Interest Rate Mortgage Canada – Fixed Versus Adjustable Rates
The rates of interest on mortgages in Canada are directly related to the rate of interest of bonds released by the Bank of Canada. In the recent downturn of the global markets, the rates of interest did go low in the real estate market in Canada. However, it is expected by the financial as well as the real estate experts that the rates may push up in the near future. This, however, should not worry you much as there are various options available to suit your needs.
The Interest Rate Mortgage Canada for residential real estate properties is regulated by Canada Mortgage and Housing Corporation (CMHC), a government agency. This agency issues regulations that guarantee mortgages at lesser costs. These regulatory rules include mortgage insurance policies and safeguard the interests of both – the lenders as well as the borrowers.
Mortgage banks as well as non-banking financial institutions provide a number of different mortgage loans with various paying methods and rates of interest. The two major rates of interest on your mortgage are the Fixed Interest Rate Mortgage Canada and the Adjustable Rate of Interest. This brings to the fore the question: Which is the better option?
This simple question which every mortgage borrower asks has no simple answers. Do you go for the adjustable rate mortgages (ARMs) with their tempting low initial costs or do you go for fixed rate mortgages (FRMs) with their rate and payment security? Opting for an ARM brings with it uncertainty as the rates of interest on your mortgage may change any time, increasing your mortgage burden. On the other hand, opting for a fixed Interest Rate Mortgage Canada may turn out to be more expensive in the longer run if the interest rates fluctuate considerably.
Simple options, but tough decisions.
Adjustable Rate Mortgage
If you are a layman ARM is not easy to understand. Your mortgage lender is quite flexible at the time of determining margins, adjustment indexes, and caps, among other things. If your mortgage company turns out to be unprofessional or shady, you could be in a lot of trouble.
This is what an ARM offers as an advantage straight up: lower rates of interest leading to lower payments initially. If the rates of interest keep on falling, you do not need to consider refinancing. The savings in interests help you in investing your savings. With your rate of interest lower, you can consider going for a larger home than you would otherwise consider.
Opting for an adjustable Interest Rate Mortgage Canada gives you an opportunity to play with the market rate. You will, of course, at times need to pay more than the market interest rate and other times substantially less. If the health of the economy stays constant, it may be a good decision to go for adjustable rate of interest as you would, most probably, not pay more for your home.
Opting for ARM does come with its inherent disadvantages as well. Interest Rate Mortgage Canada and hence your monthly payments, can increase significantly. If your mortgage comes with an annual cap of 2% and a lifetime cap of 6% your rate of interest could shoot up from 6% to 12% after a year if the economy shoots up.
You could fall into a negative amortization trap where you land up owing more money at closing. This is because the monthly payments are set so low that they cover only a portion of the due interest. The balance portion gets rolled over into the balance of the principal.
Fixed Rate Mortgage
The main advantage is that the rate of interest and payment remain constant throughout the life of the loan. Knowing your fixed monthly payment, you can manage your finances more easily. The surges in the mortgage interest rates do not affect you in the least.
You may be at a disadvantage if the rates fall, as you are stuck with your now higher Interest Rate Mortgage Canada. You will, in such an instance, need to go for refinancing. This will entail going through the whole rigmarole of filing documents as well as paying a bit more in closing costs.
To decide on ARM or FRM is not going to be easy. A lot depends on how long you plan to keep on living in the house; how frequently does the ARM adjust; and what is the interest environment like when you are taking your mortgage.