Important Changes to Mortgage Qualification Coming October 17th, 2016
Not all mortgages were designed for everyone, here is some basic information about how mortgage products can differ
Deciding between going with a variable rate or fixed rate mortgage product is always difficult, but even more so as a First Time Home Buyer. Being unfamiliar with the available products is one part of the confusion, but in addition it can be even more difficult to choose because of the many unknown costs related to home ownership for a First Time Home Buyer.
| Rent was simple; pay your monthly rent and utilities, and everything else is the responsibility of your landlord. Things change when you own your own home though. Suddenly, as a homeowner you are responsible for mortgage payments, utilities, insurance, property taxes, condo fees, maintenance costs, renovations, and repairs. Budgeting becomes key. Just as in business, certainty is incredibly important when setting budgets. The more costs that can be set in stone, the simpler it becomes to forecast costs, and thus easier to set a budget for yourself.Going with a Fixed Rate Mortgage Product solves at least one element of your home budgeting equation. Fixed rate mortgages function exactly as they sound: your mortgage payments, and interest rate are locked in for the length of time you choose. |  |
Peace of mind comes at a price though. Fixed Rate Mortgage products are generally priced higher than Variable Rate Mortgage products carrying identical term lengths, so if cost is your only concern, going fixed might not be the solution for you.
Variable Rate Mortgages can provide tremendous saving opportunities to all home owners -First Time Home Buyers, and seasoned veterans alike. At present, and at most points during the past decade Variable Rate Mortgages have been offered at a lower rate than Fixed Rate Mortgages offered at the same time, for equivalent term lengths (1, 3 or 5 years). Today, the best available Variable Rate Mortgage rate being offered is 2.10% for a 5 year term vs 2.54% for a 5 year Fixed Rate Mortgage Product. For those looking to minimize the cost of home ownership, the variable rate mortgage is a solid option. Lower rate = lower cost. The downside with this product is that it carries a certain level of inherent risk: if the Bank of Canada increases its Key Overnight Lending Rate, or the Banks raise their Prime Lending Rate, you would see your monthly mortgage payments go up. There is another option though.
There are 3 basic Mortgage Types: Fixed, Variable & Adjustable
The 3rd type of mortgage is called an Adjustable Rate Mortgage. Adjustable Rate Mortgages function as a hybrid of the conventional Fixed and Variable Rate Mortgage products available in the market, offering a fixed mortgage payment for the sake of stability, while at the same time providing mortgagors with a cost advantages of a Variable Rate Mortgage. With a fixed payment in place, should rates go up or down you would simply see a change in the portion of your mortgage payment going towards interest, and principal. The risk that Adjustable Rate Mortgages carry is that they can become subject to a ‘balloon payment’ at the end of the term if mortgage rates went up during the course of your term. The ‘balloon payment’ is designed to ensure that your mortgage remains on schedule to be paid out in 25 years. For example, lets say you took out a 5 Year Variable Rate Mortgage today at 2.10%, carrying monthly payments of $1,500 of which $750 was going towards paying down your principal, and the remaining $750 being interest. Imagine a scenario where the Prime Rate increased by 1% after 3 years, and suddenly the interest in your monthly mortgage payment jumped to $1,100. When this change occurs, you would suddenly begin falling $400/month behind on your mortgage schedule, meaning at the end of 2 years, you would have to come up with a ‘balloon payment’ of $9,600. While the Adjustable Rate Mortgage offers stability during the course of your selected mortgage term, it does carry the risk of a ‘balloon payment’ at the end of your term. Keep this in mind.
As you can see, there are several options and factors to consider when selecting a mortgage product. Beyond rate, there are several factors that can affect the cost of a mortgage. It is important to speak with a knowledgeable mortgage broker when it comes to securing your mortgage, because the mortgage product you select will have a lasting effect on your financial future.
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