How To Choose Between a Variable or Fixed Rate Mortgage

The difference between fixed and variable rate mortgages has narrowed over the last few years. Fixed rate mortgages have the advantage of peace of mind, as the payments are fixed monthly. However, their rates have also been steadily increasing in recent years. In comparison, variable rate mortgages tend to be lower in their rates, but also include additional risks. As a result, determining which to go with can provide a nerve-racking and daunting task. Here, we will help you choose between a variable or fixed rate mortgage by assessing your risk tolerance, lifestyle, and income.

Rewards vs Risk

As mentioned, variable rate mortgages, which also go by the names adjustable rate mortgages, tend to entice prospective homeowners with their lower base interest rates when compared to fixed-rate mortgages. However, the initially lower interest rates also have their drawbacks, as interest rates are subject to change without notice. As a result, volatile market conditions can cause interest rates to rise exponentially, placing a greater financial strain on buyers who aren’t prepared to absorb the additional costs.

As a result, you need to determine whether or not you can afford a possible interest rate increase in the future before deciding which choice is better for you and your family. For instance, if you think you’ll be able to afford a sudden 2% increase in interest rates, then a variable rate mortgage may be the right choice. To better determine which option will suit you, you need to assess your current income and potential future earnings. If your current job has room for advancement then you may be able to whether any interest increase storms in the not too distant future.

Mitigating Risk

You can actually take advantage of a variable rate mortgage while also mitigating some of the risk by fixing your monthly payments at an amount that is higher than the required minimum payment. In other words, if you simply make the minimum monthly payments then a variable rate mortgage may not be right for you, as you may be unable to take the hit of a marketed interest rate increase in the not too distant future.

This is why many financial advisors recommend that borrowers set their payments at the current 5-year fixed rate. This will allow borrowers to have a buffer in the event that rates rise in the future. In addition, they will be able to benefit from the lower variable interest rate as they will be able to allocate more of their payments in order to pay down the principal.

In other words, you’ll be able to benefit from your prepayment privileges while also staying ahead of your amortization payments. Another advantage is that you’ll be able to lock in for the remainder of the term in the event that interest rates do rise, essentially providing you with the best of both worlds.

Understanding Market Volatility

It doesn’t really matter whether you have a dozen doctorates in economics and finance or just a high school diploma. Trying to determine the ebbs and flows of interest rates is virtually impossible. Some borrowers may opt to stick with a variable rate mortgage when interest rates are low and then switch to a fixed mortgage rate when they notice interest rates start to increase.

However, most financial experts advise against this strategy due to the volatility of the market. The safe bet is to think of your long-term financial goals and needs. That is, if you think you will save more money on average over the long-term by going with the initially lower interest rates of a variable rate mortgage, then chose it.

Analyzing Conversion Rates

If you are currently under a variable mortgage plan then check to see the conversion rates, as well as whether or not you can convert it to a fixed rate at any time. If you can convert at any time with your current plan then find out the interest rate you would obtain if you were to switch out for a fixed mortgage option. Also, don’t just settle for the posted rate. That is, the posted rate may be 5.69% but a little sleuthing may help you obtain a lower fixed rate, such as 3.69%

Opt-In for the Popular Choice

Many Canadians end up choosing a fixed 5-year term when deciding on which mortgage scheme to go with. Also, the drop in rates, as well as the narrowing of the spread between variable mortgages and fixed rate mortgages, have only made choosing a fixed rate mortgage plan even more appealing to many Canadians.

The general rule of thumb is that when fixed-rate interest rates are within a point of their variable rate counterparts, then going with fixed is the way to go. As of this writing, the differential was within 1 percentage point. Many young families with children opt for the fixed mortgage option because it is the safer bet. Having a fixed rate means that families can budget easier and more effectively and plan for the length of their mortgage term. If you are the type of person who always chooses an extended warranty plan when you purchase a new gadget or appliance then it recommended that you choose a fixed mortgage option for that additional peace of mind.

Don’t Decide Alone

Deciding on whether to go with a fixed term mortgage or a variable term mortgage is not an easy task, and should not be taken lightly. Volatile market conditions and an uncertain job market can prove dire for some first-time homeowners, so your best bet is to plan a meeting with your financial advisor to determine which option is best suited for your unique needs. They will be able to better assess your finances, your future goals, both career and family in order to recommend the best mortgage solution for you and your loved ones.

For more more information about choosing the right mortgage for you, call Northwood Mortgage on +1 (888) 495-4825 or contact us here.

source: northwoodmortgage.com

What Happens After Your Mortgage Is Paid Off?

Fixed rate mortgages, variable rates, mortgage terms, payments schedules—these will all be things of the past when your mortgage is paid off. However, you can’t just make your final mortgage payment and forget about it entirely. There are steps to take when finishing paying off your mortgage. So, what happens after your mortgage is finally paid off?

 When Last Payment Is Done

After you’ve made the last payment on your mortgage, you’re still not home free. No matter the type (fixed rate mortgage, variable mortgage, etc.) making the last payment doesn’t clear your debt until the appropriate paperwork is filled out. You’ll also need to pay a discharge fee to the lender to fully rid yourself of the mortgage. The discharge fee removes the legal registration of the burden from the land titles from the lender. Depending on the lender the discharge fee can vary but it’s usually in the $350 range.

There is no law saying you have to pay the discharge fee immediately after making your last mortgage payment but you should do it within months. Without paying the discharge fee you will not be able to sell your home, transfer its title or obtain another mortgage.

Once the Mortgage Has Been Discharged

The lender will send a document to the registry office letting them know that your title is now clean and there is no longer a lien on your property. This means that if you sell your home, all the equity is fully yours. Then, you’ll need to look over your mortgage statement. Fixed rate mortgages, variable mortgages, all mortgages in fact, come with a statement. This is a document that is sent out twice yearly to show the balance, insurance rate, monthly payments and balance of tax account (if the taxes are paid with the loan) of the mortgage. When you receive this statement after making your final mortgage payment make sure it shows zero balance.

You’ll also need to verify that your credit report no longer contains your mortgage. Keep in mind that this could take a few months. Furthermore, if you had mortgage insurance with your loan, this will expire the moment the mortgage is paid off, so you don’t need to worry about it any longer.

The Final Steps

When you’ve paid off your mortgage in full, you are still required to pay property taxes. If your taxes were rolled into your mortgage, you’ll have to call your city and arrange to make the payments on your own. Now, it’s up to you whether you wish to borrow against the home again. You don’t have to take out fixed rate mortgages or traditional mortgages, you can take out a line of credit instead.

source: northwoodmortgage.com

All About Fixed Rate Mortgage Penalties

Fixed rate mortgages are the most common, and the least risky, mortgage choice. As the name suggests, having a fixed rate mortgage means that you pay the same amount each month towards the principal, over the agreed-upon period of time.

Many homeowners choose fixed rate mortgages so that rising interest rates won’t affect their monthly payments. Additionally, a fixed rate mortgage offers easier planning for monthly expenses. Often, fixed rate mortgage plans last two to three years, but you can also get longer ones that last five to ten years.

Although fixed rate mortgages seem simple enough, there are some things to consider when choosing a mortgage, specifically what kind of penalties you may incur with a fixed rate mortgage. Fixed rate mortgages tend to be inflexible, and there are two main types of penalties you can incur…

Early Redemption Penalty

You may be subject to an early redemption penalty if you pay off your mortgage earlier than agreed upon. You may also have to pay an early redemption penalty if one of your repayments exceeds your overpayment allowance.

Early Repayment Charge

Many lenders include extended tie-in periods with fixed rate mortgages. This means that even once your mortgage period has ended, you must keep your mortgage with the same lender for a specific period of time. If you try to switch lenders, you will be subject to an early repayment charge.

You will also have to pay an early repayment charge should you try to get out of your current mortgage, for instance to switch to a different lender, or if you are selling your home. Your early repayment charge will usually be about 3-5% of your original loan.

Overall, a fixed rate mortgage will penalize you more harshly for exiting the mortgage before the agreed upon date. The penalties can be very costly, and often the wording in the contract is confusing, especially to first-time homebuyers. If you want more flexibility in your mortgage, a variable rate mortgage may be a better choice for you. While there is less predictability involved, a variable rate mortgage typically offers more options for homeowners when it comes to ending a mortgage or making repayments.

Choosing which mortgage solution is right for you can be downright confusing. Fortunately, our highly trained, professional mortgage consultants are here to help you with all of your mortgage questions and concerns! Please, contact us today to set up a consultation!

source: northwoodmortgage.com

How Mortgage Rates Are Determined in Canada

For many Canadians, their home is the biggest investment they will ever make, and their mortgage the most significant loan. When shopping for a mortgage, people generally look for ways to get low mortgage rates.

A mortgage rate doesn’t refer to the size of the mortgage loan, but rather the interest rate on your mortgage. Obviously before you buy, you’ll want to search for a low mortgage rate. There are many factors that affect mortgage rates in Canada, and a fuller understanding of these factors can be an immense help to the inexperienced buyer when applying for a mortgage.

In this article, we’ll look at a basic outline of how mortgage rates are determined in Canada, including some ways to get a low mortgage rate.

Fixed vs. Variable Rate Mortgages

There are two kinds of mortgage loans available to Canadians: fixed or variable rate mortgages. A fixed rate mortgage, as the name suggests, keeps the same interest rate and monthly payment for the duration of the term. A fixed rate mortgage is ideal for those who want more stable financial planning, and want to avoid any surprises due to sudden inflation.

A variable rate mortgage adjusts based on the lender’s prime rate, which is determined by the Bank of Canada’s overnight rate. This means the interest rates can change day to day. While obviously there is some risk involved with a variable rate mortgage, they can often save Canadian homeowners money. While the monthly payment remains the same, lower interest rates mean that more of your monthly payment goes towards your principal. While some homeowners fear sudden increases in mortgage rates, banks generally avoid this so as not to incur any backlash.


The Mortgage Market

Mortgage rates are set based on a number of factors. These factors, or steps, are referred to as the secondary mortgage market. When you are granted a mortgage loan, the following steps occur:

• Your mortgage is sold by the bank/lender to a third party investor, known as the aggregator.
  
• Your loan is combined with other loans by the aggregator to form a mortgage-backed security.
  
• The mortgage backed security is divided into shares, which are sold to other investors.
  
  

Therefore, your mortgage rates are based on what the aggregator will pay for the mortgage, but also by the worth of the mortgage-backed security and what investors are willing to pay. This creates a competitive mortgage market, with homeowners benefitting from low mortgage rates and investors benefitting from higher mortgage rates.

It can be complicated to understand everything that goes into determining mortgage rates in Canada. The best way to understand mortgage rates is to consult with one of our mortgage professionals. They understand the market thoroughly and will be able to explain how everything works, and help you find a low mortgage rate! Contact us today to schedule a consultation.

source: northwoodmortgage.com

What Is A Variable Rate Mortgage?

When mortgage shopping, many buyers think that a fixed rate mortgage is the only way to go. However, a variable rate mortgage may actually save buyers money in the long run, although it can be riskier. Here’s how variable rate mortgages work:

 As opposed to a fixed rate mortgage, which is a flat rate paid throughout the mortgage term, without fluctuating interest fees, a variable rate mortgage is based on lender prime rates, and will fluctuate with the bank’s interest rates. If you are considering a variable rate mortgage, it’s best to speak to a mortgage expert as they will have a thorough understanding of the current interest environment.

While a fixed rate mortgage allows for better financial planning and eliminates the chance of any surprise, there are some reasons why a variable rate mortgage may be a better option. For one, if you know the lender’s rates are currently low, and you’re planning to only own the property for a short time, a variable rate mortgage may help you save money. Other possible perks of variable rate mortgages include:

    -If interest rates are expected to fall, you could capitalize on that in the future.

    -More flexibility: The penalty and extra interest fees are much harsher on a fixed rate mortgage if the mortgage is broken. The interest will be less on a variable rate mortgage.

    -Although it’s not without risk, variable rate mortgages have been proven to save Canadians money over time.

    -With a fixed rate mortgage, your payment won’t change even if interest rates drop significantly.

There is really only one risk to variable rate mortgages, which is the risk that interest rates will rise suddenly. This is, however, unlikely, as banks will try to avoid raising rates in order to avoid public backlash.

If you are considering a variable rate mortgage, you should be able to still cover your payments should there be a raise in interest rates. If you are able to afford the risk, then a variable rate mortgage can definitely save you money. If interest rates are currently low, and you want greater flexibility with your mortgage, then a variable rate mortgage can give you that.

Since there is risk and more complexity involved with a variable rate mortgage, it’s important to seek out the advice of mortgage experts to guide you in the right direction. Northwood Mortgage can help you with all your mortgage needs, whether you choose a fixed or variable rate mortgage. Contact us today with any questions about how we can help you, or apply now!

source: northwoodmortgage.com

Which Factors Affect Mortgage Rates?

When it comes to mortgage rates in Canada, there are so many factors involved it can be hard to keep track. You’re probably aware that the Bank of Canada is a top player in how mortgage rates are determined, but there’s more to it than the BoC simply deciding what rate to set at any given time. Everyone is looking for a low mortgage rate, but the factors that affect variable mortgage rates are different than those that affect their fixed rate counterparts. Below, we’ll explore the differences.

Variable mortgage rates

A variable rate mortgage is a loan where the interest rate may change during the mortgage’s term. As the borrower, your monthly payment will be same, but if there is a low interest rate, you will still be able to take advantage of it. For example, if the interest rate increases, the amount of your monthly payment that is applied to the mortgage’s principal will decrease. On the other hand, if the interest rate decreases, the amount being applied to the principal will increase.

When it comes to variable mortgage rates, these are determined by the Bank of Canada’s key interest rate (or overnight rate – the rate that banks are able to charge one another to cover their daily transactions) and how they affect the commercial banks’ prime rates. The prime rate is the lowest mortgage rate at which any bank’s best customers can borrow money. So, when the BoC increases their rate, which they do often to fight inflation, the rates on variable mortgages go up as well.

Fixed mortgage rates

A fixed rate mortgage is a loan in which the mortgage rate remains the same throughout the term. Unlike variable rate mortgages, fixed rate mortgages do not depend on the Bank of Canada to set their rates. In a fixed rate mortgage, the rates are affected by the bond market. The bond market is the commercial fiscal market where banks and other financial institutions can buy and sell securities in the form of bonds. The interest rates in the bond market move up and down more frequently than the prime rate. This is due to the sensitivity of the bond market and how it responds to market fluctuations.

Does the time of year affect mortgage rates?

There is no perfect time of year to get a low mortgage rate. The Bank of Canada sets their rates eight times yearly: late January, early March, mid-April, late May, mid-July, early September, mid-October and early December.

source: northwoodmortgage.com

The Difference Between Fixed Rate Mortgages And Variable Rate Mortgages

One of the first questions that homebuyers ask when taking out a loan is: Should I get a fixed rate mortgage or variable rate mortgage? It’s not something that should be taken lightly, because the difference between the two loans could translate into thousands of dollars over time. One is not necessarily better than the other. The one you eventually choose will depend on your personal taste, financial situation, and the prevailing economic climate.

Fixed Rate Mortgages

Fixed mortgage rates are as the name implies: fixed. The interest that is established when the loan is first taken out is the interest you will pay for the duration of the loan. This is regardless of the prime interest rate, which could be higher or lower than what you are paying on your mortgage.

Advantages: Fixed rate mortgages are a good choice for those who are seeking peace of mind when it comes to their finances. If your income is fairly stable and predictable in the near (and perhaps long-term) future, then you can afford the luxury of knowing that regardless of what happens, your rate won’t change.

Disadvantages: The major disadvantage is that you cannot take advantage of low interest rates and may very well end up paying more than you would if you had taken a variable rate mortgage.

Variable Rate Mortgages

Variable rate mortgages, on the other hand, are not fixed. The interest rates fluctuate according to economic conditions, and this could be above or below what you would be paying on a fixed mortgage. Variable rates do carry an element of risk, but they can be worthwhile if interest rates dip for a prolonged period of time.

Advantages: If interest rates are set to fall in the coming months, then you would be much better off with a variable interest rate. It is good for those who have an appetite for risk and are in a position to pay the current rate in anticipation that it will drop in the coming months. Historically, variable rates have proven to be less expensive over time, but you need to be able to see things from a long-term perspective.

Disadvantages: Rates can go up instead of down, and if you aren’t prepared for the challenges that come with this, then you could be in a difficult position.

You should go over your financial situation as well as the prevailing economic conditions with a qualified financial advisor. At Northwood Mortgage, our agents will be happy to help you make the best decisions in light of your situation.

source:  northwoodmortgage.com