Variable Mortgage Rate: Guide 2022!

by | Jun 14, 2022

How does a variable rate mortgage work? Well, there’s a learning curve to financing your home, and plenty of dotted lines to sign before finalizing your mortgage. But to find the best-suited mortgage for your financial outlook is an important step, because of the rocky waves in the Mississauga housing market right now.

According to the Bank of Canada, A variable rate mortgage is a mortgage that works by describing the rate of interest that is charged to borrowers.  In fact, the interest rate is based on changes in the Prime Interest rate.

Still, feeling confused about mortgages? Don’t worry, you’re not alone. At Yogi & Associates, we’ve been meeting with customers in Mississauga for years, who come to us asking questions about how variable-rate mortgage works. We want you to be informed before applying for your mortgage, so here’s an overview of the process and how interest rates work. As always, contact Yogi & Associates if you want to get a clear understanding of how a variable rate mortgage works. Our team is happy to answer any questions you may have!

“Our primary objective in every mortgage transaction should be to borrow in a way that reduces debt, improves financial stability, and helps us get debt free in as short a time as possible!” ― Dale Vermillion

How Does A Variable Rate Mortgage Work?

Variable-rate mortgages are also called ‘adjustable-rate mortgages because this type of mortgage has a variable or “floating” interest rate. Thus, a variable rate mortgage means your interest rate can change along with the prime interest rate. With a variable-rate mortgage, you have the option to pay more each month. Therefore, you can reduce the term of your mortgage. You can pay less each month to pay off your home faster. But, If you choose to make larger payments, those additional amounts are not tax-deductible.

Variable Mortgage Rate: Guide 2022!

Types of Variable Mortgages:

  1. Closed Variable Mortgage
  2. Open Variable Mortgage

1. Closed Variable Mortgage

A closed variable rate mortgage means you can only refinance your mortgage once every 12 months. However, there’s no limit to the number of times you can make extra payments above and beyond what you owe, but it can come with limitations and penalties. Therefore, you are typically allowed to make extra payments of 5% to 30% of the original loan amount in any given year.

2. Open Variable Mortgage

Open variable mortgages allow you to make larger, irregular payments on your mortgage. In other words, You can pay anything upfront, or even pay off the entire amount owed at any time without penalty. This flexibility comes at a cost, however. Open variable mortgage rates are typically at least 1.50 percentage points higher than closed mortgages. This is because of its flexibility.

Variable Mortgage Rate: Guide 2022!

Pros and Cons of Variable Rate Mortgage:

Pros Cons

Interest Rates:

Variable-rate mortgages are priced according to the interest rates set by the Bank of Canada. Also it also fluctuates with the market.

Interest Rates:

If you’re considering taking a variable rate mortgage, ensure you have the means to make higher repayments if interest rates increase.

Penalty:

You don’t have to pay the penalty for breaking your mortgage, however, you can switch to another type of mortgage at any time.

Penalty:

Although there is a lower penalty for breaking a variable rate mortgage, even though you can be charged a break-up fee if you decide to quit your mortgage contract before the end of its term.

Flexibility:

Variable-rate mortgages provide you more alternatives for repayment. This includes the flexibility to make additional payments without paying a price. Hence, borrowers with variable income can pay in one lump sum and save money on monthly payments.

Non-Flexible:

Variable-rate mortgage interest rates fluctuate depending on prime lending rates and other factors. So, borrowers find it challenging to forecast cash flow over time. A rise in rates can cause chaos in your cash flow. As a result, this can leave you feeling uneasy. Therefore, you may protect yourself against unexpected events and pay off your loan faster. This can be done by using loan features like offset accounts and redraw capabilities.

Wrapping It Up!

Variable-rate mortgages are ideal for those who want to take advantage of falling interest rates, but also for those who can tolerate some fluctuations in payment amounts. In other words, variable rates can go up and down as market rates do, but the most common reason for this increase is usually a change in the Bank of Canada’s rate (this is based on economic factors). Therefore, If you have cash reserves to tap into throughout the year, this type of mortgage can be a good fit, since fixed costs will not fluctuate much.

Your mortgage can affect many things in your life. Choosing the best product and rate is extremely important. But if you choose the wrong one, you can have a big impact on how much your monthly payments are. Don’t stress about it though… we’re here to help! Contact Yogi & Associates and we will provide you with helpful resources, and knowledgeable advice. This will help you along the way in choosing the right mortgage product for you.