What you should know about a Variable Rate Mortgage (VRM)
Variable rates are insecure, they are scary, they are only for the most risky of home owners. This is what my parents taught me. This is what they learned when they got a mortgage. Now that I am a Mortgage Agent, it is my job to explain to everyone why this is not true.
1. Rates do not Jump Huge Increments Your mortgage rate will be prime minus a certain amount (eg. prime - 0.48). What you need to know is that the Bank of Canada moves prime very slowly. It is set at 8 meetings per year & has only increased more than 0.25% four times in the last 25 years. When it is increased this is a strategic decision based on the Canadian Economy, increasing it fast would be detrimental and just doesn't happen.
2. Stress Test = Peace of mind
The scare tactic around variable rates has always been that if the rates go up you may not be able to afford your home. However, this is true of any rate these days. That is why the Canadian government introduced the stress test into mortgage qualification. The stress test is a way for us to prove that all clients will be able to pay a mortgage should the rates be at the bank posted rates in a couple years when you are ready to refinance. Now all products, fixed or variable require clients to undergo this stress test which currently requires you to qualify at the bank posted rate of 4.64 even though current fixed rates are in the neighbourhood of 2.45-2.70.
3. Avoid stretching your finances too thin
It is never a good idea to base what you can afford on the minimum. If you can only afford the minimum then buying is not a good idea whether you choose a fixed or variable product. We never want to be in a situation where 5 years from now we cannot afford our home if rates have changed. If you are buying based on being able to afford the minimum and crossing your fingers you will not end up house poor than you may need to save up a little more before diving into home ownership.
4. Money saved in interest = more principle paid
Savvy business investors take full advantage of paying less interest on a variable rate product. They look at how much they want to pay per month and top up their monthly mortgage payment to that amount. By doing this they are paying a fixed rate each month but every extra dollar is pure principle pay down. If the rates go up they add on slightly less paying down less principle but keeping their monthly payment constant just like it would if they had opted for a fixed product.
5. Penalties are less
A variable penalty will always be less than a penalty to break a fixed mortgage. If you need to move, sell your home, refinance before your term is up a variable rate mortgage will usually charge much less to break your mortgage than you would have to pay on a fixed product. It is easy to say, I will never need to break my mortgage. However, recent statistics suggest that close to 80% of Canadian homeowners refinance/break their mortgage before their term is up, that is a huge statistic to ignore. Look at how much it will cost you to break your product BEFORE you sign up for it.
How can we help?
When you are looking at mortgage products we encourage you to look at everything that is available. There are cases where a variable product, 2 year fixed or 10 year fixed are going to be your best options. As licensed Mortgage Agents we would love to help you look at ALL the options for your current or future property so that you can select the product that will best fit with your needs. With access to over 50 lenders we have lots of choice for you, message us today at email@example.com or call 289-645-1568.