Mortgage Rates – Choosing a Fixed or Variable Rate Mortgage
One of the most important aspects of choosing a mortgage is choosing a fixed rate, or variable rate loan. Most advisers will tell you to seek out fixed rate mortgages because they provide stability. With fixed rate loans, you will always know what your interest rates are going to be, which makes the size of your payments much more predictable over time. However, adjustable rate mortgages are, on occasion, lowered by lending institutions, which means that you are giving up the chance of paying a lower rate when you choose a fixed rate mortgage.
Fixed Rate Mortgages
A fixed rate mortgage has a set interest rate that will never change throughout the term of your loan. Your payment will always stay the same during this time period, even though the amount of principal can lower continually from one month to another. In fixed rate mortgages, the first years of the loan will typically be spent paying down your interest payments. Most fixed rate mortgages in Toronto start at 25 or 30 year amortizations.
Fixed rate mortgages are ideal because it gives you some stability, and allows you to protect yourself from sudden and unexpected rises in toronto mortgage rates. They are also much simpler for the average consumer to understand, which makes them ideal for those that are shopping for their first home. Although the interest rate of the loan is fixed, the interest that you end up paying will be directly influenced by the term of the loan. In a 30 year mortgage term, you will pay substantially more in interest than you would with a 20 year mortgage. So while it might seem ideal to choose the longest loan term as you possibly can in order to reduce your monthly payment, you will pay for that decision in the amount of interest that you pay over time.
Variable Rate Mortgages
A variable rate mortgage is a loan that has the interest rate change over time. These loans have interest rates that are typically set below the prime rate in Canada, but do not provide the stability and predictability that you will find in a fixed rate loan. Typically, most variable rate loans are going to have a period of time in which the interest rate does not change, and then after that time period, the rate may change.
This is beneficial for financial institutions and lenders because it allows them to change their interest rates over time to better reflect the value in the market. It also benefits borrowers because they receive an interest rate that is below market value for a set amount of time at the beginning of the loan (typically 5 years). The shorter the term or rate period, the lower the initial interest rate in most cases. This is an ideal situation for someone that is planning on paying off their mortgage quickly.
Whether you choose a fixed rate or a variable rate for your mortgage, the most important thing you can do is educate yourself on both systems and have a deep understanding of the benefits and issues with both. The type of mortgage that you choose should directly reflect your personal circumstances, and reflect your own fiscal situation.
Secured Line of Credit or HELOC
The secured line of credit has become a popular option in Canada besides a fixed or variable rate mortgage. This is because the main feature of the line of credit is it’s flexibility. Borrowers can use the available credit limit to purchase items or investments, etc. and then pay back the loan freely or without penalty. Interest is only charged on the balance owing , not the credit limit. The main disadvantage of a credit line is that it carries a slightly higher rate of interest than a variable rate mortgage or a fixed rate mortgage.