When purchasing a home, one of the first decisions you will have to make is whether to choose a fixed or variable rate mortgage. Fixed-rate mortgages and Adjustable-rate mortgages are the two primary types available to buyers. Which one choose depends on your income, lifestyle and risk tolerance.
A fixed-rate mortgage charges a set rate of interest that does not change throughout the life of the loan. Although the amount of principal and interest paid each month varies from payment to payment, the total payment remains the same, which makes budgeting easy for homeowners.
The main reason why many people elect for a fixed- rate mortgage is that it protects the borrower from sudden changed in the overnight rate. When the overnight rate increases, so does your monthly mortgage payments.
Qualification for a fixed rate is the benchmark rate set by the government of Canada or the contract rate plus 2% depending on the mortgage you are applying for.
The downside to having a fixed- rate mortgage is that you will likely be paying a higher monthly payment and interest rate than a variable rate. Historically variable rates have proven lower. An other downside if the penalty is based on an interest rate differential or 3 months interest whichever is higher. Depending on your lender the interest rate differential could be calculated to charge back the discount you were originally given.
Although the rate of interest is fixed, the total amount of interest you’ll pay depends on the term of your mortgage. Lenders will offer fixed-rate mortgages in a variety of terms and amortizations, the most common of which are a 5 year term with 30, 20 and 15 year amortizations. The 30-year mortgage term is available on conventional mortgages only.
AAn adjustable – rate mortgage means that the interest rate can vary over the term depending on the overnight rate. Variable rates at time of signing are determined by the lender, the lender sets out the rate available according to the current bond yield. This rate could be prime +” X ” or prime – “X”. Your principle and interest payments are reset monthly to pay off the loan faster. You also may see your monthly payments decease if the overnight rate decreases.
Qualification for a fixed rate is the benchmark rate set by the government of Canada or the contract rate plus 2% depending on the mortgage you are applying for. The downside of an adjustable- rate mortgage is the risk that the overnight rate may move which increases their monthly payment.
You can choose a variable or fixed rate mortgage when you apply using the My Mortgage Auction app! So what are you waiting for?