Variable vs Adjustable Rate Mortgage

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Variable vs Adjustable Rate Mortgage

Did you know there are two types of mortgages whose interest rate can change as per the change in the lending institutions prime rate? That’s right, the two types are the Variable Rate Mortgage and the Adjustable Rate Mortgage.

You now might be asking what is the difference between a variable vs adjustable rate mortgage. In this post we provide a general overview of each one and hopefully provide a clear explanation to your question what is the difference between a variable vs adjustable rate mortgage.

variable vs adjustable rate mortgage

Adjustable Rate Mortgage – ARM

Payments automatically adjust with changes in the prime rate of the lending institution your mortgage is with to ensure that you maintain the original amortization schedule of your mortgage. The rate varies during the term of the adjustable rate mortgage.

The interest rate can change from time to time because it changes when the prime rate changes.

If your adjustable rate mortgage interest rate decreases, the payment amount also decreases..

If your interest rate rises, the mortgage payment amount will also increase.

One advantage of this product is you can have the ability to potentially lower, short-term interest rates.

 

Variable Rate Mortgage – VRM

The main difference with a variable vs adjustable rate mortgage is that the mortgage payments with the variable product remains fixed for the duration of the term; as the interest rate changes with any fluctuations in the prime rate. If the prime rate decreases, more of the mortgage payment will go towards paying off the principal; if the prime rate increases, more of the mortgage payment will go towards interest costs.

Your amortization period (number of years to repay the mortgage) may vary and be longer if rates have risen or be shorter if rates have fallen since the start of the term.

 

With both the Variable Rate Mortgage and the Adjustable Rate Mortgage you can always convert your mortgage into a fixed rate mortgage should you feel that the prime rate is rising or don’t have the tolerance anymore of rate fluctuations. Most of the time, the variable and adjustable interest rates are lower than the fixed rates.

If you still are not sure of which one is better or what the main differences are between a variable vs adjustable rate mortgage we encourage you to contact us with your questions and we would be happy to answer them. You may also like to add your remarks and questions in the comment section below.

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Variable Rate vs Fixed Rate Mortgage

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Variable Rate vs Fixed Rate Mortgage

This is probably one of the most popular and famous questions of all times in the real estate mortgage financing world; variable rate vs fixed rate mortgage. Which one is better? or Which one is worse? How do you decide which mortgage product is good for you?

variable rate vs fixed rate mortgage

To look at variable rate vs fixed rate mortgage as a question for your own good would be right for everyone depending on their own unique needs and tolerances.

A fixed rate mortgage has a rate guaranty for the term of the mortgage. For example, if you get the 5 year closed fixed rate, then, you are guaranteed to hold on to your rate for the full five years without it changing. There is a sense of security and closure for you knowing that you don’t have to worry about the fixed rate changing during the life of your mortgage term.  Even if you are an investor of real estate, this type of a mortgage can be beneficial to you because you know exactly what the interest rate will be and can calculate your R.O.I. accurately and work into your formula other expenses, which would allow you to know exactly what your net income could be each year. One down side to a fixed rate mortgage is the fact that if you ever decide to break the term / contract in the middle of it, the penalty can be significantly higher than if you were to break a variable mortgage.

A variable rate mortgage many times starts with a much lower interest rate than its counterpart fixed term rate. The variable interest rate is a discount that you would get from the lender against it’s prime lending rate. For those who are not tolerant of minor rate adjustments throughout the term of a variable rate mortgage, this product might not be your cup of tea. Currently the Bank of Canada has not changed its stance on the prime lending rate and it has not changed since September 9, 2010. However, the lenders have changed their discounts off of the prime rate. Several years ago you could have been approved for a variable rate as low as Prime minus .90%. Since then the current average discount for the closed variable rate is Prime -.50%. If you are planning to break your mortgage in the middle of its term, the penalty for the closed variable rate mortgage is three months interest payments, which for the majority of the time comes out a lot less than if you were to break a closed fixed rate mortgage that uses a formula called interest rate differential to calculate the penalty amount.

However, overall, statistics have shown that you can save more money if you go with a variable rate vs fixed rate mortgage. As of the date of writing this post the 5 year fixed closed mortgage is 2.99% and the 5 year closed variable mortgage is Prime -.50% = 2.50%.

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