The goal of a mortgage should be to pay as little interest as possible over the full term of your loan. By choosing a Variable Rate Mortgage (VRM) history has shown that 88.6% of the time according to York University’s Dr. Moshe Milevsky you will come out ahead over choosing a fixed rate.
Semi-Annual vs. Monthly Interest Compounding
Choosing a Variable is an easier decision to make when we are in a declining or flat interest rate environment much like we have seen the past two years. But what about at a time when the Bank of Canada has begun to place hints into their rate announcements that Prime rate increases are coming?
Variable Rate Mortgages are either calculated Monthly or Semi-Annually depending on the lender. I recommend that if a client is choosing a VRM today they do so at a lender that calculates the interest semi-annually. Not only will you enjoy slightly lower payments right away because interest is calculated semi-annually instead of monthly but by choosing a lender that calculates their interest semi-annually on a VRM this means the rate is changed quarterly (from your Interest Adjustment Date), not on the beginning of the following month when Prime changes. In an increasing interest rate environment this means you will get the benefit of a lower prime rate longer.
Locking in your Variable Rate Mortgage
An often overlooked condition on a mortgage commitment is the lock in terms of your mortgage. When you obtain a VRM from a lender in most cases they allow the option of locking into a fixed rate mortgage at any time.
This is a great feature that allows peace of mind for many borrowers. What isn’t on the mortgage commitment of many lenders however is what rates will be offered should you decide to lock in. It’s important to look for a lender that doesn’t play the posted rate game like most big banks and ensure the lender always offers best rates to clients when they lock in.
How do I find out if I’m in the right VRM?
I’d be happy to answer any questions you may have about your current lenders mortgage. If there’s something better available I’ll let you know. If it’s in your best interest to stay with your current lender I’ll let you know that as well.
Feel free to contact me anytime or leave a comment below.