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What is Variable Rate Mortgage?

5-Year Variable Mortgage Rates

Variable rate mortgages are attractive as they have a low interest rate for a certain period, which is usually less than the rate on a fixed rate mortgage. This interest rate difference allows you to save some amount at the beginning of the mortgage term. However, once the introductory period ends, the rates may move up or down according to the market trends.

The increase in the interest rate can be problematic for borrowers with variable rates. In a worst-case scenario, the mortgage payments can be higher than your budget, making it impossible to make the payments and eventually loses the home to foreclosure. Remember, the more money you borrow, the more a change in the interest rate will affect your monthly payments.

5-Year Variable Mortgage Rate Defined

A variable rate fluctuates with market interest rate, also known as the ‘prime rate’ that is determined by the Bank of Canada. In case of 5-year variable mortgage, borrowers are committed to a variable type rate and mortgage payments till the term expires. In a variable rate, the mortgage payment is set up – either with a fixed payment, where the interest rate fluctuates; or a fixed sum applied to the principal where the interest rates change the overall mortgage payment.

What is “Prime”?

Prime is the benchmark interest rate used by major banks when pricing for short term loans. Prime is decided by the Bank of Canada and it can dramatically change your monthly mortgage payments. The current economic conditions determine the prime lending rates.

Over the last 25 years, the Bank of Canada has:

  • Changed the prime lending rates 6 times every year
  • The changes in the rate has been either 0.25% or 0.50%
  • There has been 1.23% fluctuation in the prime lending rate

Fixed or variable payments?

Borrowers are liable to make a certain mortgage payment over the full term of the loan. The fixed payment amount is generally based on the 5 year fixed rate.
On the contrary, variable payments fluctuate with the increase or decrease in the prime rate determined by the Bank of Canada.

Open or Closed Variable Mortgage

Open Mortgage

In an open mortgage, borrowers are allowed to make additional mortgage payments without incurring any prepayment penalty. They can renew, refinance or switch lenders at any time. An open mortgage usually comes with a higher interest rate.

Closed Mortgage

In a closed mortgage, borrowers cannot pre-pay the mortgage amount. You will incur a penalty if you refinance or sell your home before the term expires. This type of mortgage provides borrowers a sense of stability who wants to stay in their home for a longer term.

We, at GN, provide reliable mortgage solutions to our clients across Toronto, Brampton and Mississauga. Our ultimate aim is to provide our customers with the solutions that can help them achieve their financial goals. We can also help you in mortgage renewal, refinancing and switching lenders. We work hard to deliver a great experience for every client.

Call us today to discuss your mortgage needs with our experts!
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