There are many types of mortgages and it is important to be well informed so you get the product that is the best for you, your goals and your lifestyle. Valuable information below to get you started.
How Mortgage Rates Are Set:
The chartered banks set the Prime lending rate (The rate they offer to their best customers). They base their decisions on the Bank of Canada's overnight rate because that's the rate that influences their own borrowing. More information here.
The Bank of Canada makes rate announcements 8 times per year. Variable mortgage rates and lines of credit move in conjunction with the Prime lending rate.
Banks use Government of Canada bonds to raise money for fixed rate mortgages. In the bond market, interest rates can fluctuate more often, since they're subject to the changing moods of traders and bond investors, who try to figure out how fast the economy will grow and where inflation is headed. As a result, watch the bond market for clues on where fixed mortgage rates will go next.
Fixed Rate Mortgages:
A fixed rate mortgage gives you the peace of mind that your payments will not change for the entire length of the mortgage term.
Fluctuations in the Prime lending interest rate will not affect you. You do not need to worry about increasing mortgage payments to account for how the changing rates may affect your payment breakdown in regards to interest and principle. However, if interest rates drop, you may be paying more interest than those on a variable rate mortgage.
Payout penalties are based on the interest rate differential between the current rate and the rate you have at the time of the mortgage breakage as well as the time remaining in your fixed term. Different banks calculate this in different ways. Please contact us for more details.
Variable Rate Mortgages:
Variable mortgage rates are tied to the Prime lending rate. The rate is determined by adding or subtracting interest rate points. For example, if your rate is "Prime minus 1,' than your interest rate would be 2.95% if Prime was set at 3.95%. If the Prime rate lowers or increases, your rate will follow.
When the Prime rate goes down, more of your mortgage payment will go towards paying off your principle. Conversely, when the Prime rate goes up, more of your mortgage payment will go towards interest.
If variable rates rise higher than what your mortgage payment will cover in interest alone only payments, your bank may increase your mortgage payment or you could extend your amortization. This is the case when your payment is fixed as opposed to where your actual payment will increase and fall as the rate changes.
The payout penalties on the variable rate mortgages are usually 3 months interest. This gives you more flexibility to break the mortgage before the end of the term.
