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| Bank Rates |
Term |
Our Rates |
| 6.75% | 1 | 5.50% | | 7.25% | 2 | 5.50% | | 7.30% | 3 | 5.50% | | 7.30% | 4 | 5.50% | | 7.30% | 5 | 5.39% | | 7.65% | 7 | 6.20% | | 8.00% | 10 | 6.25% |
| Posted: 5/5/2008, OAC |
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Take advantage of the lowest interest rates in 30 years!
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Comparing Variable Rate Mortgages
You have probably heard of Variable Rate Mortgages (VRM) but you may not have a clear idea as to exactly how they work. This type of mortgage has become very popular in recent years as there can be a tremendous advantage over a fixed rate mortgage.
The most important thing to know is the difference between how the rates are set for fixed rate mortgages and VRM. VRM revolves around the "prime rate". "Prime" is set based on the Bank of Canada's rate, plus whatever minimal increase the major banks have decided to use as a premium. While fixed rates are safe, they are often well above the rate on the VRM and fixed rates are usually based on the Canada Bond rates plus 1-2%. With many VRM, the lenders offer a "prime minus" discount and fluctuate as prime changes. However, most give you the comfort of being able to lock in the mortgage to a fixed term should you feel that rates are heading higher.
Educating yourself on the different VRMs out there can ensure that you pick the best product with the best features. However, with over 17 lenders offering VRMs how can you differentiate what is the best VRM? Your Discount Mortgage Canada Inc mortgage consultant can help you decide by reviewing all the many different features of each product with you.
There are 9 main features that you should be aware of before selecting which VRM is right for you:
The Term:
It is important to know how long the VRMs term is. You definitely want to find out if it is an open or closed term as well.
Initial Discount :
Some lenders and brokers will offer an initial discount, or "teaser rate" to get you to call them. You need to know how much of an initial discount you will be given and for how long (example: 1.5% less than prime for the first 3 months).
Rate after Initial Discount:
While the initial discount seems attractive, it may not be in your best interest to go that route. The key is knowing what the discount will be after the teaser rate is no longer in effect. Sometimes when you average it out over the course of the term, it doesn't work out in your favour. For instance "Lender 1" is offering you a VRM. It's a 5 year term with an initial discount of 1.01% off of prime for the first 9 months. The discount after those 9 months is 0.25% below prime. "Lender 2" is offering you a VRM as well. It's a 5 year term with no initial discount or teaser rate. For the whole term the discount will be 0.75% below prime. When you average it out over the full 5 year term, the true discount with "Lender 1" is only 0.36% below prime, while "Lender 2" has maintained 0.75% below prime. In this example, which is based on actual products available today, a person may think that he or she is getting a great deal by getting an introductory rate through "Lender 1", but in actuality they are getting less than half of the discount that they would receive with "Lender 2".
Payment Options:
Some lenders have restrictions on when your payment can be made. This can be a factor in your decision as to which lender to go with. Perhaps you prefer to pay weekly, or bi-weekly? If that's the case, then it's important to know which lenders are flexible with their payment options, as not all lenders are.
Conversion Options:
As mentioned above, you may want to lock into a fixed term. Therefore, you need to know what policies are in place when you are ready to lock in. Is there a fee involved? Do you have to wait a period of time before you can lock in? Do you have to lock into a certain length of term? All factors should be considered.
Interest Rate at Lock in:
Although all product features are important, this is probably the most important feature. Many lenders, especially banks, promise that you will receive the best rate possible when you choose to lock in. But whose best rate? Is there a clear policy in place to ensure that you get the best rate? Was it just a verbal agreement between you and your bank manager who might be transferred in six months and therefore cannot honour your agreement? It is imperative that you have the lock in feature's rate policy in writing, something most major banks can't do. Without a clear policy in place, you are guaranteed nothing…and you could end up with a really high rate when you are ready to lock in.
Pre-payment Options:
It's always nice to know the amount of "privilege" payments that you are allowed to make onto the principal balance of your mortgage. Perhaps you are coming into some money? Maybe every year you get a nice bonus that you want to apply to your mortgage? You'll need to know what percentage you are allowed to apply and what percentage you can increase your regular payments by incase you want to pay off your mortgage faster.
Penalties:
Although you may think you will stay in your mortgage for the full term, it's good to know what your penalty will be if you decide to sell, transfer, or refinance. Some institutions charge astronomically high penalties, so it's important to find out how they will calculate your penalty when/if you decide to break out of the mortgage. Some lenders would only allow you to pay out your mortgage before the term is up if the house is sold.
How Often Changes Occur:
Since your mortgage rate is fluctuating around prime, you'll need to know how often you payments will change. Will your payment change every time prime changes, or will it be changed monthly if the prime rate has changed or quarterly? Also, you might be the type of person who likes to know exactly what your payment is each period, so it might be beneficial to know if you can just set your payment at one specific amount permanently. By doing this, anything that you are paying over and above your required payment goes directly to your principle balance and you end up paying off your mortgage faster!
Here at Discount Mortgage Canada Inc., we thrive on the fact that we know every product inside and out. Give us a call and we can answer all your questions regarding all variable rate mortgages and which one is best for you.
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