Choosing the right mortgage type—fixed rate, variable rate, or adjustable rate—can be challenging, considering factors like payment stability, interest cost minimization, and comfort with payment fluctuations.

Here’s a breakdown of the key insights:

Fixed Rate Mortgage:

  • Interest rate remains fixed for the entire term, ensuring consistent payments.
  • Indirectly influenced by Government of Canada bond yields.
  • Popular choice with the 5-year fixed term being widely used in Canada.
  • Ideal for those seeking stability and predictable payments.
  • Penalties for breaking a fixed-rate mortgage may be higher.
  • Recent times have seen significant changes in fixed rates.
  • Review the latest commentary here.

The Prime rate in Canada as of April 12th is 6.70% and is the interest rate that banks and lending institutions use to set the interest rates for many types of loans and lines of credit.

Variable Rate Mortgage (VRM) and Adjustable Rate Mortgage (ARM):

  • Interest rates fluctuate with the lender’s prime rate plus or minus a set percentage.
  • VRM offers a fixed payment, allowing increased principal payments when interest rates drop.
  • ARM provides flexible payments that decrease with decreases in the Prime rate.
  • Increase payments based on the prime rate plus an additional percentage or use prepayment privileges to decrease amortization.
  • VRM and ARM offer potential savings and flexibility in favourable market conditions.
  • Penalties for breaking VRM or ARM are typically three months’ interest, unlike the costlier interest rate differential (IRD) penalty for fixed-rate mortgages. Click here to learn more about Penalties.

Variable Rate Mortgage (VRM):

  • Payment remains the same, but the portion allocated to interest adjusts.
  • Amortization changes with this type of mortgage.
  • Payment adjusts only if the prime rate significantly exceeds the interest payment coverage.
  • VRM allows for adjustments until reaching the balance called the Trigger Point. Click here to learn more about Trigger Points.
  • Adjustments may involve payment changes, prepayments, or paying off the balance.

Adjustable Rate Mortgage (ARM):

  • Interest rate adjusts based on changes in the Prime rate.
  • Payment changes with fluctuations in the Prime rate.
  • Suits owner-occupied homebuyers requiring less active monitoring.
  • Lending institution notifies you of new mortgage payment when rates change.
  • Payments decrease when rates drop, while the amortization remains the same.

Choosing between Fixed, VRM, or ARM comes down to your comfort level and budget flexibility. If you prefer certainty and a consistent payment, a fixed rate might be the best option. Most major banks offer VRM, while most monoline lenders offer ARM. Some lenders allow you to choose.

Remember to have a candid discussion with me to understand the risks and rewards of each mortgage type. If your mortgage is maturing soon and you need guidance, reach out to me for personalized assistance in determining the best rate type for you.

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