Toronto Real Estate News

Variable Rate Mortgages

Everybody's heard of Variable Rate Mortgages (VRMs)-but very few people understand what they are, how they work and so people tend to shy away from one of the best products available to help them pay down their mortgage faster. As one of the most innovative mortgage products available, the variable rate mortgage (V.R.M.) is increasing in popularity among Canadians. The VRM caters to individuals who have a higher risk threshold and believe that the bank rate will either remain stable in the near to mid future.

The greatest difference between VRMs and fixed rate mortgages is how the rates are set. VRM rates are set based on the Bank of Canada rate. The chartered banks add a slight premium to the Bank Rate to establish the Prime Rate. This is what most lenders use to price their various VRM products.

In our system, the Bank of Canada uses its bank rate to control inflation in the economy. When little or no inflation is present, as is the case right now, this rate tends to be set at very low levels and is relatively stable. The fixed rates, on the other hand, are set based on the yield in the bond market. The bond yields are very volatile and tend to fluctuate, often due to political and economic conditions. This volatility makes it impossible to gauge what fixed rates will do, even in the short-term.

There are three main components to a VRM product that consumers should be aware of.

• Ongoing "prime minus" feature.
• The opening or "teaser" rate.
• Lock-in feature of each mortgage company.

Currently, there are more than 15 different and distinct Variable rate mortgage products in the market place. All of this choice generally leads to confusion among most prospective clients. Quite often it becomes difficult to distinguish between products. But like all products only, one or two products are usually better suited to fit your needs than the rest.

The first component of the mortgage, what we refer to as the "prime minus" feature, follows this simple definition. "The discount below the banks prime lending rate which a mortgage client is charged on an on-going basis."

For example, if the bank's prime lending rate is 5.00%, bankers will vary their discounts from prime minus .25% (4.75%), to prime minus .50% (4.50%). Every banker is different, but mathematics leads us to the correct solution. A quarter point (.25%) difference over a five-year term can certainly make a big difference!

The second component, the "teaser rate", is the interest rate charged for the first three to nine months. This rate is intended to lead a client or persuade a client to choose a particular banks product. A good rule of thumb to follow is that if the teaser rate is low (1.9% to 4.9%) it may be likely the on going rate may not be as competitive in the market place.

The last component to ask yourself is simply this "down the road, if I want to lock in to a fixed 3, 5, or 10 year term, what rate discount will I receive?" One of the most popular features of the Variable rate mortgage is that at any time, a client is able to lock in their mortgage to a fixed term. Some banks will not fully discount the interest rate at lock in time.

In many respects, this mortgage appears complicated. With my assistance you can navigate your way through the maze and ensure that you receive the BEST product available to suit your needs. After all, a VRM is still one of the best products available to help you pay your mortgage off faster. It's worth the effort to find out more.

HEATHER PATERSON
THE MORTGAGE COACH
416-457-7775