Variable-rate mortgages have become quite popular in the last 30 years. They have been easily outshining the fixed-rate plans with their amazing discounts. The best variable rates have had discounts reaching up to one percentage point off prime rate.
Why Choose Variable-Rate Mortgages?
The 5-year variable-rate mortgage plans have become a popular choice amongst numerous Canadian individuals. Here are a few reasons to help you understand why:-
- In a case where breaking of the contract earlier than anticipated time occurs, there is a lesser penalty amount for you to pay as compared to fixed rates.
- There is less interest in Variable- rates Mortgages as compared to fixed rates. The interest rates have been declining steadily for the past three decades in the case of variable mortgages.
- There is more versatility in variable rates mortgages. For instance, people can refinance earlier without the fear of paying penalties.
Some Interesting Facts about Variable Mortgages
- Variable rates are well-liked when the prime rate is about to decrease. Another way it can be in more demand is when the difference between fixed and variable rates exceeds one percentage point. According to history, the difference in points between the five year fixed and Variable plans has been about 1.25 points.
There can be about two types of payments in variable mortgages depending on the lender:
- Set payments: The payment remains the same throughout the whole term. If the prime rate increases, your lender might tell you to pay more interest and lesser principle, and vice versa. The basic requirement is that your payment should at least comply with the interest due. If you fail to meet your interest dues, your lender might increase the payment due.
- Floating Payments: In this method, your payments increase and decrease simultaneously based on the criteria of usually the current prime rate.
- About one borrower out of every five selects 5-year variable rates mortgages plans. The increasing difference between fixed and floating payments can attract more borrowers to such plans.
- A majority of the lenders pays your legal and assessment fees when you switch to a 5-year mortgage plan. When switching to another lender, you will have to refinance the mortgage plan, which mostly consists of the legal fees.
A Few Disadvantages of Variable Rates
- In a situation where the debt ratio is a bit high, variable rates are quite difficult to acquire. That’s because the lenders need some kind of proof that you can afford the 5-year plan. They usually check if you can pay up for the 5-Year fixed plans in case the rates go up. Borrowers can only partake in this if they exceed the criteria set up by the Bank of Canada.
- There’s a high probability of mounting interest rates if the rates continue to increase significantly.
Assessing the Popularity of Variable Mortgages Rates
The stats indicate that fixed rates are more popular than variable rates with a 66% preference. However, about 29% of the population prefers a variable rate mortgage which is a healthy minority. Old-age groups prefer fixed rates while the variable rates are more popular in younger groups.
The 5-year term is the most frequent term period for mortgages. It is more suitable as it is the average between the specified term ranges of about 1 to 10 years.