Understanding Canadian interest rates work should be the first step on the road to getting a mortgage or any kind of financing. Interest represents the true profit for a bank or other lender when making a loan; you’ll want to speak with one of our Toronto mortgage brokers to make sure you’re getting the lowest interest rate! If the interest rate is low, the profit on the loan is lower and more of your payments will go towards paying the actual amount borrowed instead of profit out of thin air. In Canada there is a great deal of consumer rights protection over interest, but it’s still important to make sure that your interest rates are low.
What is Variable Interest Rates?
Many different types of mortgages will be packaged with a Variable Rate, or Adjustable Rate (aka ARMs). Variable rate interest isn’t necessarily bad, but it’s not necessarily all that great either. It can easily lead to more interest, which means more debt, which means more money to cover just the bare minimum.
It’s good to make sure that your VRM or ARM type mortgage has a reasonable “annual cap” and “lifetime cap” so it can’t shift too far beyond what you signed up for. So if right now you’re offered a 5% interest rate on an ARM, and the lifetime cap is fixed at 6%, your mortgage’s interest rate will never go over 11%. There can be caveats to this though, so you’ll want to speak with one of our Toronto mortgage brokers to make sure that you understand the rules of an adjustable rate mortgage before you sign on for one.
What Are Fixed Interest Rates?
Fixed interest rates are just what they sound like, fixed interest rates. They’ll usually remain around the same percent as what you signed on for, bar a few exceptions. Many lenders will have special clauses in the mortgage or loan contract that will give them the right to bump up the fixed interest rate to a higher number.
As mentioned earlier, the more interest that a lender can charge a borrower the more profit is generated from the mortgage. You’re going to need to have a Toronto mortgage broker look over your contract to make sure that none of these “special clauses” are inherently or overtly unfair. Prepayment clauses will bump up your interest rate for example if you pay your mortgage payment EARLY, penalizing you for being a “bad borrower” by paying off more of your principal and diminishing the amount they can collect in interest.
Interest rates are very important, and you’ll want to make sure that you’re getting the best rate for your situation. Just because you have bad credit or no credit doesn’t mean you have to accept a bad mortgage! If you’d like to know more about how you can get a mortgage tailored for your needs, speak with one of our Toronto mortgage brokers today! We’ll be able to help you better understand the role that interest rates play in the mortgage process.