The variable rateThe variable rate mortgage is not for everyone. If you are not concerned about interest rate fluctuations and you can afford to increase your payments when necessary, the variable rate mortgage offers several significant advantages, such as accelerated repayment of the capital.With this type of mortgage, the interest rate varies according to the market. Usually, it is very close to the bank’s preferred rate, much lower than the fixed rate. When compared to the fixed rate mortgage, the variable rate mortgage makes it possible to repay the capital more quickly and offers the possibility of saving on interest costs.
Fixed payments As the interest rate varies, the payments can remain the same. When the rate drops, you repay most of your capital; when the rate increases, you repay more of the interest. For example, your monthly payment is $639.81 (i.e., $145.95 in capital and $493.86 in interest) on a $100,000 loan amortised over 25 years at a variable rate with payments set at a rate of 6%. When the rate drops to 5%, you repay $227.42 in capital and $412 in interest. On the other hand, when the rate increases to 6.5%, you repay $105.34 in capital and $534.47 in interest. In short, the variable rate mortgage with fixed payments facilitates budget planning and allows you to repay the capital more quickly while benefitting from decreases in the interest rate.
Variable paymentsThe variable rate mortgage also makes it possible to make variable payments that will drop when the bank rate drops, which will give you the possibility of immediate cash savings.Generally, financial institutions allow you to convert the variable rate mortgage into a fixed rate mortgage under certain conditions. In this way, you can lock in your interest rate if you foresee a large increase in the market rate. Furthermore, most financial institutions will allow you to make an additional payment once a year in order to reduce your capital. So, if your budget allows you some room for flexibility and market fluctuations are not a source of stress, you can benefit from the many advantages of the variable rate mortgage. |
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