Today, the average Canadian is much more savvier and informed about mortgage options than 3 years ago, which makes the task of explaining to a potential customer the different mortgage options a lot easier for a mortgage broker.
We have assembled below some of the most popular questions related to fixed & variable rates, terms and mortgage types, with the aim of providing as much quality information as possible to help you make the most educated decision within your realm.
What is Fixed Rate? – The rate charged on the mortgage remains steady for the entire term of your mortgage, for example: 3.79% for a 5 year term
What is Variable Rate? – The rate charged on the mortgage floats based on the Banks prime rate, for example: Bank prime less .40% = (Bank prime as of March 15, 2010 is 2.25% so prime (2.25%) less .40% = 1.85%)
What are the advantages of 1 year fixed? – based on the current discounts with variable rates this is not as attractive an option as it has been in the past.
What are the advantages of 2 year fixed? – not a great option when you look at the discounts on variable rate mortgages
What are the advantages of 3 year fixed? – If you compare to a 5 year fixed then there is a great interest savings during the term of the mortgage. Drawback is with rates rising why taking a chance over year 4 and 5!
What are the advantages of 4 year fixed? – rate difference between 4 and 5 years is not significant enough to take a 4 over a 5 year with rates rising. Major plus is that most people refinance their mortgage after 3.5 years so this option might lessen or eliminate the penalty!
What are the advantages of 5 year fixed? – most people pick the 5 year option for their mortgages. This may be one of the best options based on the rising interest rate environment. With most experts picking rates to begin their rise in late 2010 then this may be one of the best stress options!
What are the advantages of 7 year fixed? – significant rise in rates over the best 5 year rates. In some case up to 1 ¼ % higher. This is not a great seller for the lenders and if considering and not planning on moving or refinancing then choose a 10 year term
What are the advantages of 10 year term? – Think about having the same rate and payment for 10 years! Good idea? Let’s explore… 1 ½% jump in interest over a 5 year! After 5 years you can refinance without the awful IRD (Interest Rate Differential) only 3 months interest penalty! Does paying the extra interest make financial sense? If you set your 5 year mortgage payment at the 10 year payment think of all the extra money you would payoff from your mortgage!
How about Variable Terms? – If your plan is to ride out the variable for the short term then lock into a fixed term than my suggestion is to lock in NOW! The reason is this, with rates at historic lows and the variable at historic lows then we have hit the lowest for both rates. If you ride the wave for a year then plan to lock into a 5 year rate think about this. What if the 5 year rate has risen to near 5 %? Would it not make more sense to take the 5 year fixed rate now OR continue to ride the wave of the variable rate mortgage? Historically people who have taken the variable rate have done better than those who took fixed rates. Major drawback is that not everyone can handle or has the ability to endure the payment fluctuations. There is less payment security with a variable rate, but you make up for it in interest savings. You need to decide what is important to you, security or savings.
There now have 4 terms for variable up from just 2 in the past. We have 1, 3, 4 and 5 year terms. There are also variable and capped variables along with open variables. Keep in mind when you see an open variable, there is always a premium for an open term.
What is a capped variable? – What a capped variable is the lender with charge the interest rate based on prime less something. The payment is based on a higher rate, usually the posted rate, and this will not change. When the prime is low as it is now the amount of interest charged is minimal. With the prime rate raising the amount if interest charged rises and less goes directly to principal. Capped variables are at very few lenders.
If you plan to take a shorter variable 1 or 3 years then you are banking on deeper discounts when the term comes due.
What are 5 year Cash Back Mortgages? – These are still an option for people who have not been able to save up a minimum 5% down-payment. Drawback is that you pay a higher rate for the 5 years of the mortgage and if you would like to refinance you may have to payback part of the cash received upfront. If you can find a family member to gift you the amount then you will pay less interest. The down-payment on this type of mortgage is not free!
What is a 5 year No Frills Mortgage? – If you do not intend to use the pre-payment privilege on your mortgage these types of mortgages can offer lower interest rates. Less than 5% of mortgages actually have people use the pre-payment option.
What is a Hybrid Mortgage? – A Hybrid mortgage is part fixed rate and part variable rate. This gives a borrower the best of both worlds. Part variable so they can benefit from the lower rates and part fixed so they can also have the peace of mind of knowing what their payment is! The variable portion can be converted to fixed if so desired.
What are the HELOC rates? – Home Equity Line of Credit or line of credit rates have remained stubbornly high while the variable rate mortgages have dropped. We have rates now in the prime plus .60%.
* Please always bear in mind that the replies above should only be used as a guide and not taken as recommendations for any particular products. Do not hesitate to consult the Mortgage Girl team. We will be delighted to help you decide the best course of action.
Rates quoted are subject to change without notice. OAC and E&OE