There’s been a lot of information in the news lately regarding the Bank of Canada and the possible/probable increase to interest rates due to soaring inflation rates. If you’re feeling like you need a PHD in order to filter through all the “industry jargon” and numbers data, you’re not alone.
In an effort to provide a clear understanding of what the changes could mean to you as a potential home owner. We spoke with one of our preferred mortgage specialists, Karen Low, at Quantus mortgage solutions. We worked together to come up with a simplified breakdown of the mortgage options available to you, and how interest rates affect them.
- There are 2 types of mortgage options for you to choose from; “fixed rate” or “variable rate”.
- A “Fixed rate” maintains the same interest rate for the term of mortgage. Therefore, your monthly payments remain the same regardless of what changes may be occurring with interest rates in the market. The interest rates offered for a “fixed” mortgage are based on the bond market.
- A “Variable rate” is subject to change during the term of the mortgage. The interest rates offered for variable mortgages are based on Prime rate, which is set by the Bank of Canada. Since the Bank of Canada meets 8 times a year to assess whether the rate is left unchanged, increased or decreased, Prime Rate can fluctuate. Which means your mortgage payment amount would be adjusted to reflect any change in Prime rate at that time.
- The “Term” of your mortgage is different from the “Amortization”. The amortization is the number of years over which you agree to pay back the lender for the total amount of the mortgage, typically 25 years. While the “Term” breaks the payment schedule down into shorter lengths of time. It can be on a month-to-month open term, or set for longer periods of time, up to 15 years in duration. You can discuss the term and rate options with your mortgage specialist when applying for a mortgage, and then decide on the option that most comfortably suits your personal finances.
Here’s an example of how the two compare in practical terms:
As of January 28, 2022, a 5-year insured fixed rate is about 2.89% and the variable rate is 1.35% (a difference of 1.54%). That means the spread between the fixed and variable rate is significant enough that even if prime rate increases 6 times, and goes up by .25% each time, you would still be further ahead from an interest perspective if you chose a variable rate.
Additionally, should you choose to opt for a variable rate mortgage now, and decide later on that you want to switch over, you can lock in to a fixed term at any time! A Quick call to your lender can get the change done the same day!
You can rest assured, that though interest rates may change from time to time, the current mortgage rates available are still at incredible lows. Which means the opportunity for you to invest in owning your own home is still a very good financial option! So, now, when the time comes for you to decide between a fixed or variable rate mortgage, you can confidently choose the option that feels right for you!
If you’d like any additional information on the Topic of Interest rates, we’d be happy to connect you with one of our mortgage specialists!
Sincerely,
The Rosts
*The information herein is deemed reliable but not guaranteed, qualified rates are subject to change and personal credit history*