There are a number of different options for taking out a mortgage on a home. One of these is a variable rate mortgage. However, you may be wondering what a variable rate actually is. To help, below is an explanation of what variable rate mortgages are, how they work and who they may benefit.
What Is a Variable Rate?
The interest rate for a mortgage can either be fixed or variable. A fixed interest rate will not change during the entire life of the loan. A variable rate, on the other hand, can and will. The changes in the variable rate are based on fluctuations in something known as the prime rate. A prime rate is what is used by banks and other lending institutions to charge interest to credit worthy customers. For Canadians, the prime rate is set by the Bank of Canada.
How Do Variable Rate Mortgages Work?
The interest rate given to the mortgage holder, however, will not simply be the prime rate. Instead, the variable rate will be calculated by adding or subtracting a certain percentage to or from the prime rate. Obviously, the best variable rate for the mortgage holder will be the one with the largest percentage subtracted from the prime rate. As mentioned before, the prime rate the variable rate is based on will fluctuate during the year. There are eight times during the year in which the Bank of Canada may change the prime rate. These changes will be reflected in how much people with variable rate mortgages are forced to pay in interest for their loans.
Who Do Variable Rate Mortgages Benefit Most?
Fixed rate mortgages are best for homeowners that want absolute security in the fact that their interest rate won’t change for the life of the mortgage. While this is true, the fixed rate offered to homeowners is typically higher that the variable rate. In fact, the prime rate sometimes stays relatively low for multiple years in a row as was the case between 2010 and 2014 when it remained at three percent. Still, there is the possibility that the variable rate could raise at some point to a level above the fixed interest rates of comparable mortgages. Variable rate mortgages are best for homeowners that are willing to take a risk in exchange for possibly paying less for interest.
Choosing between fixed rate mortgages, variable rate mortgages and other options can sometimes be complicated. If you wish to learn more about variable rates or anything else regarding mortgages, please contact reputable mortgage broker Gerry Orr at 403.249.9650.