Homebase Mortgages

How Do Variable Rate Mortgages Work?

\"variableThere are many different kinds of Canadian mortgages on the market, and one of the most popular is a variable rate mortgage, also known as an ARM. ARMs, or adjustable rate mortgages, aren’t sitting at a fixed rate. They can go up and down throughout the life of your loan, and you could wind up with extraordinarily low interest rates or extraordinarily high interest rates (it’s usually the latter). It’s important to make sure that from the start you can get the right terms for your mortgage; this is why you want to talk to one of our Toronto mortgage brokers to get the best deal for you.

Always Adjusting

A variable rate mortgage is constantly adjusting throughout the year to make the most of the mortgage. This isn’t to make the most of it for you, but for the lender. Mortgage lenders only make money off of interest, and the interest needs to be at the maximum amount over the life of the loan to maximise the profit of the lender. There are Hybrid ARM loans that will remain fixed at the beginning of the term (for the first 10 years for example) but then they switch to an ARM that can go sky high. No one can predict the future and you can only hope that the prime interest rate remains low.

How a Variable Rate Mortgage Affects You

If you have a variable rate mortgage, it can affect you positively or negatively; how it will work over the life of your loan will depend on the terms you were granted at the outset. This is why you need a knowledgeable expert on your side to make sure that the loan conditions are fair and equitable.

There is something known as an “annual cap” which will cap how much your interest rate can fluctuate up or down over the course of a year. The “lifetime cap” affects how much your interest rate can fluctuate up or down over a lifetime. Both of these can easily effect whether or not the loan will be favourable for your situation. The standard for an ARM or variable mortgage will be about 6%, but it can go lower and higher depending on what kind of credit score and income you have.

But when the annual interest rate swings up and down, you’ll notice it in your monthly payments. More of your payment will go towards principal (original amount borrowed) when it’s lower, and more will go towards interest when it’s higher (if you pay the minimum payment).

We’ll help you compare many different lenders to make sure that you’re getting the best terms possible. We’ll help you figure out what your monthly costs will be for your mortgage and what you can expect to pay over the life of the loan, not just the number you’re borrowing. We’ll help you see the whole picture before you borrow, so you can get through the process with zero surprises. If you’d like to learn more, speak with one of our Toronto mortgage brokers today!

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