Two types of variable rate mortgages

Rising mortgage payments

Do you have a variable rate mortgage?

Did you know that not all variable rate mortgages are equal?

One is a variable rate mortgage and the other is an adjustable rate mortgage or ARM. It’s important to know the difference when you commit to a mortgage product with a lender.

Many don’t realize that there are two different types of mortgages with floating rates. Both are commonly referred to as “variable rate” mortgages but they actually are not the same.

The type of floating rate mortgage you have will depend on which lender holds your mortgage. When the Bank of Canada adjusts the prime lending rate, the rate on your mortgage will change accordingly.

The Bank of Canada doesn’t just decide to raise or lower interest rates on a whim. It has eight scheduled interest rate announcements a year. If the Bank of Canada changes interest rates, that’s when it can affect you if you have a floating rate mortgage.

Here are some of the differences between the two.

Adjustable Rate Mortgage

The interest rate floats with the prime rate but the monthly payment will change as rates rise or fall. The amortization of your mortgage (how long it takes to pay it off) will not change.

There are pros and cons to an adjustable rate mortgage. You are forced to pay down your mortgage within the same timing you originally committed to with your lender. The downside is it can be difficult from a budgeting perspective if your mortgage payments keep increasing.

Variable Rate Mortgage

The interest rate floats with the prime rate but the monthly payments will remain the same unless interest rates rise to the point where you are no longer covering the required interest payments on the mortgage. The amortization of your mortgage will increase with rising rates and decrease if interest rates go lower than when your mortgage payment was originally set meaning you could pay off your mortgage sooner but conversely it could take you longer to pay off your mortgage and cost you more in interest charges.

We are currently in a rising rate environment, with the Bank of Canada raising rates 0.25% in March, 0.50% in April, 0.50% in June and a historical increase of 1% in July. No one has a crystal ball but we fully expect to see another 0.75% on Sept. 7, again on Oct. 26 and then again on Dec. 7.

Those who are currently in an adjustable rate (ARM) will face a 4.50% increase in their mortgage rates if this happens, with payments increasing accordingly.

Are you concerned about your mortgage payment rising further?

There’s another option rather than locking into a (higher) fixed rate, an option that creates a static payment for five years with no further payment increases.

If you are currently in an adjustable rate mortgage and you would like to schedule a review of your options, please schedule a time to chat here on my calendar. www.calendly.com/april-dunn I’m happy to review possible options with you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Credit rating, mortgages

A lack of basic financial knowledge can be the difference between getting a mortgage at a great rate and having a mortgage with an alternative lender where you end up having to make much a higher payment.

Your Fico Score, which is shown on your credit report accessed by lenders, indicates to a mortgage lender the probability of whether you will successfully make your mortgage payments on time.

Fico scores can range from a low of 300 up to a high of 900, which is the highest possible score. A good credit score would be in the mid to upper 600s and a credit score below 620 could prevent you from obtaining a mortgage from a prime rate lender.

So what makes up your credit score?

  • 35% is for late payments, bankruptcies, collections and judgments
  • 30% is for current debts
  • 15% is for how long accounts have been open and established
  • 10% is for the type of credit, such as credit cards or personal loans
  • 10% is for new credit enquiries

Here are some examples of the common mistakes that homeowners or potential homeowners make that can result in a poor credit rating.

  • Chronic late payments. Do not ignore the small stuff. No matter what the size all bills must be paid on time, including your cell phone.
  • Maxing out your credit cards. You should not exceed 50% of the limit on your card. Even if you pay off the balance every month, it will still negatively affect your Fico Score. Spread your spending out over a few cards.
  • Do not over apply to creditors and lenders. Don’t fill out applications at car dealerships if you are shopping for a car. Don’t fill out the credit card application at the booth in the mall or the airport. Every time you fill in an application, they will check your credit.

A great tip for managing your credit is to pull your own credit report at least a couple of times a year. It is the responsibility of a consumer to correct any errors and it takes a long time for reporting to be amended should there by an error.

If you need to repair your credit, the best tactic for improving your credit score is to consolidate debt. Taking out a short term second mortgage to pay off all debt will basically wipe the credit clean so it is positive.

By allowing two or three months for the reporting to go through to the credit bureau a few times, the report will start to show a higher credit score and you will now be considered for more competitive interest rates at an “A” lender.

There are some easy steps that can be taken to improve your overall financial picture and ensure that you are getting the best terms and rates whether you are renewing your current mortgage or looking to purchase your first home.

Moving from bruised credit to “A” credit simply takes time and sound advice. A great rate is within reach.

Give me a call if you would like some advice and assistance to improve your credit score.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Refinancing your mortgage can help in many ways

Refinance your mortgage

One of the questions I get frequently is “Can I refinance or restructure my mortgage mid-term?”

The answer is yes. I can help you decide whether that makes financial sense and provide strategies for you to consider.

Here are some common reasons why you might want to refinance your mortgage.

You could decrease your overall monthly debt payments by using the equity in your home to pay off those high-interest credit cards or unsecured loans.

If you are carrying high interest credit card debt, car loans or other personal loans, you know that it can be challenging to pay off everything that you owe. You may have those post-holiday debts hanging over your head.

If you are a homeowner and there is sufficient equity in your property, consolidating all of your debt and including it in your mortgage payment might be the right solution for you.

There are many benefits to a refinance for debt consolidation including the following:

• A much lower monthly interest rate for all of your debts

• Lower monthly payments by either securing a lower mortgage rate or by extending the mortgage term

• The comfort and convenience of making only one monthly payment instead of making multiple payments on your credit cards and other loans

• Improving your credit score by reducing the amount you owe and now being able to make all of your payments on time

• Finance a renovation or home improvements

If there is sufficient equity in your home, refinancing your existing mortgage could give you the funds to complete those improvements.

There are some benefits to refinancing rather than taking secondary financing, such as a home equity line of credit because the interest rate is fixed and you will be able to make small, consistent payments for the duration of the term—which can be up to 30 years, to pay off the debt rather carrying it on a line of credit at typically a higher interest rate.

• Invest in a revenue property or purchase a second home

Real estate can be a great investment to add to your portfolio for long term investment and to create income. Utilizing the existing equity in your primary residence could be the way to get started building your portfolio.

Not sure if refinancing is right for you? The numbers don’t lie. Let’s run them together and then you’ll have an honest, unbiased recommendation and a plan of action.

You can try my refinance calculator to get started here, or give me a call at 1-888-561-2679 for a pressure-free consultation to run the numbers.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Hybrid mortgages can work to offset rising rates

Use of hybrid mortgages

A fixed mortgage? A variable mortgage? Why not both?

If you are looking at renewing your mortgage this year, you will definitely be facing some payment shock with higher interest rates. If you are looking to purchase a new home, locking in at today’s higher interest rates may not feel prudent at this time.

With interest rates on both fixed rate mortgages and variable or adjustable rate mortgages on the rise, a hybrid mortgage could offer some flexibility and reduce the impact of rising rates. You can diversify your mortgage risk similar to how you can diversify your investments.

A Home Equity Line of Credit could also be included as some lenders allow the mortgage to be broken into multiple components. You can mix and match terms in a multitude of combinations.

A hybrid mortgage allows you to manage the risk of interest rate fluctuations effectively in times of economic uncertainty with a fixed rate component and, at the same time, possibly take advantage of the lower rates on the variable rate portion of the mortgage particularly if rates start to decline during the term of the mortgage.

It can also diversify your mortgage’s conditions, including terms, amortization, payment frequency, etc. and spread out your payments so they are not all due at the same time.

The best option is to match the terms – five-year fixed with a five-year variable so if you don’t like the lender’s renewal offer you are free to easily move to another lender with a better offer instead of possibly paying a penalty on a portion of the mortgage that has a different renewal date.

Hybrid mortgages are collateral mortgages. If your mortgage is divided into different terms that mature on different dates, you could be faced with a penalty should you decide to break the mortgage early.

This type of mortgage is also more difficult to transfer to a new lender so fees could be charged to make a switch.

If you can’t decide between a fixed rate and variable rate mortgage then a hybrid mortgage could be a good option to limit your interest rate risk. It could be a great option if one party wants to go fixed and the other leans towards variable.

A hybrid mortgage is a more complicated product to consider but depending on your specific needs it may be the right choice for you. Benefits include the potential for interest savings, flexibility in payments and amortization schedules, and the savings of a variable mortgage mixed with the reduced risk of fixed rates.

As always, my best recommendation is to speak with a mortgage professional to review your possible options. Please give me a call to discuss at 1-888-561-2679 or email [email protected].

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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