Are Variable Rate Mortgages Really THAT Scary?
This is a loaded question.
Before I can answer this question, I want to explain what a “Variable Rate” actually is.
What is a Variable Rate Mortgage?
A variable rate mortgage is a type of mortgage you would obtain when buying a house. This type of mortgage is considered a higher risk than it’s counterpart “the fixed rate mortgage”. A variable rate mortgage is based
Lenders base their prime rates on the Bank of Canada’s (BoC) overnight rate. If the BoC decides to increase or decrease their overnight lending rate, lenders typically follow by increasing or decreasing their prime rate.
For example, if you sign a
So, are Variable Rate Mortgages that scary??
The media is going wild with variable rate increase speculation. And they aren’t really wrong. We are probably going to see another increase or two in the near future. However, even though your rate may increase during your term, it doesn’t mean you should be scared of considering a variable rate.
Here there are a few reasons why someone may take a variable rate mortgage:
- Most variable rates calculate their buyout penalty as “3 months interest”. This is typically one of the lowest penalties for breaking your mortgage term.
- Historically, people that have taken out variable mortgages have saved more money on interest (on average) than people that took out fixed mortgages.
- You like to take risks! As stated above, variable rate mortgages carry a higher risk than that of a fixed. Especially in a rising rate market. However, you can mitigate this risk by utilizing a few strategies I will talk about below.
How to get the most out of your variable mortgage
When getting a mortgage, you are deciding whether you should take a fixed or variable mortgage. If the interest rate is different (which they most likely are)
Take a variable mortgage – or Don’t.
So my advice to you: Take a variable rate mortgage – or Don’t. It is entirely up to you. However, educate yourself on the pro and cons of taking the fixed or the variable rate mortgage. Using a mortgage profession, such as myself, can help guide you in the “right-for-you” direction. Every mortgage is different, and everyone has a different mortgage story. Let me help you with yours.