What are Mortgage Rates?
Mortgage rates are a percentage (%) value that is charged by a lender who lets you borrow their money for a specific purpose, such as buying a home.
In real estate arena, the effective rate is always higher than your singed rate because its compounded twice a year. This is referred to as annual percentage rate (apr) due to the compounding factor.
UPDATE: COVID-19 & MORTGAGE STRESS TEST: Due to Corona virus COVID-19 pandemic, new mortgage stress test policy has not been implemented. As of August, 2021, the qualifying rate for all insured mortgages is 5.25%.
What are The 3 Most common types of Mortgage Rates?
The three mortgage rate types are fixed rates, variable rates, and adjustable rates.
- Fixed mortgage rate means interest rate remains the same throughout the term of the loan. This means the interest rate will not change. This appries to both, open mortgages & close mortgages.
- Variable rate mortgages is the opposite: the interest rate may change periodically throughout the term of the mortgage. This depneds upon federal governments Bank of Canada rate.
- An Adjustable mortgage rate is when the interest rate is changed based on an index within credit markets that determines the rate. This means that the rate can stay the same or change, depending on what the index says.
FAQ - Mortgage Rates
An open mortgage means you, the buyer, can pay the principal amount of your loan back at any time with no consequences. Open mortgages have flexible repayment terms.
A closed mortgage is the opposite: you must pay your loan back at a certain time and it is inflexible.
Open and closed mortgages both have their strengths and weaknesses depending on the terms of your loan and the total amount that needs to be repaid.
A fixed interest rate means that it is unchanged throughout the entire term of the mortgage or loan. Sometimes fixed interest rates have conditions but overall it remains the same rate throughout. A floating interest rate, also known as a variable or adjusted rate, can change throughout the life of the loan’s term.
This question depends on many variables. Historically, mortgage rates that keep increasing eventually lead to recession-like conditions. Interest rates were dropped during the last recession (2008) and have been kept relatively low since then. This is because low interest rates mean people and businesses will have easier ways to borrow and spend money.
This means it is easier to start a business, buy a home, take out a mortgage, and even have flexibility within mortgage rates and repayments.
Any home equity loan is a secured loan. You get the total mortgage amount after tying the asset, such as your home, as collateral with the lender.
In this example, the lender will be a bank. If for whatever reason you are unable to continue paying the loan and default, the bank will simply take your property and get its loan amount back.
There are many other types of secured loans. Think of car loans, buying gold, and so on. Unlike a mortgage, these loans are more prone to going up or down in their rates. the
Credit cards however are unsecured as they are not backed up by any tangible assets.
Real estate is less likely to change that drastically, and therefore presents less risk for banks to loan you money and offer you lower interest rates. This makes it convenient for both the consumer and the bank to take on a mortgage rate.
Mortgage rates are important because when you borrow a bank’s money, you should know whether or not you will be able to repay the loan in its given time, or even make the payments.
Higher interest rates mean that you will inevitably pay more money over the course of the loan if you only make the minimum payment. Lower interest rates mean the same thing but can also encourage you to regularly pay down the loan in shorter periods of time.
For homes, this is important because it can determine how long it takes for you to finally pay off the home you want to buy. Considering the mortgage rate, total term, and minimum payment are all equally important factors when looking at the price of a home as a home buyer.
They are higher because there is more risk attached in a mortgage. A bank that is willing to give you money for home that they use as collateral might find that after a recession, you are unable to pay the loan and the value of the property is less than its original principal amount.
Banks and lenders must also hold significantly larger amounts of capital with them to prevent them from loaning money to consumers that they do not really have.
Therefore, there is more risk attached in the process of loaning a consumer money if property is the asset, which makes the mortgage rate higher than the base rate.
First time home buyers and many of those who already purchased a home likes to talk about interest rates more than any other aspect of a home mortgages.
Ever Wonder, Why?
Its the only thing you hear on TV. It is not unheard of to hear that major banks have dropped their five-year interest rates; then you’ll start to hear people talking about the comparison of their “low – rates”.
It’s not necessarily about “the interest rates” – or at least it shouldn’t be. Yes, the rate is an important aspect when looking for a loan, but it’s not the main thing you should focus on.
- Special offers like 5 year fix rate mortgage of 2.59% which does not allow you to make extra payments and requires bonified sale in order to change the lender and 2.79%.
- 5 years fix rate mortgage of 2.79% which allows 20 / 20 pre payments and provides you full liberty to shop around once the term is completed.
Since terms vary for borrowers due to purchase price, length and the amount of time, here is no single digit mortgage rate that is the best for all loan periods. Take ten-year fixed rate mortgages, which currently vary between 3 and 4 percent. We don’t recommend any of our clients to got for 10 years rate terms because of penalities associated with the rates.
Understand that higher rates may look less competitive but this depends on many variables and sometimes may be the most competitive option for you at the time of consideration. Feel free to contact us for more information on mortgage rates.
3 Critical Aspects of Mortgage Rates
All closed mortgages have the pre-payment clause that mentions, if you pay off your mortgage before the (EOT) end of the term, you must pay a penalty. This is calculated based on the greater of the IRD (interest rate differential), or the 3-month interest penalty depending upon type of product you have.
Each bank has their own unique calculation formula.
Most of the banks determine your pre-payment penalties based on the posted rate minus the discount you receive. However, to calculate the pre-payment penalty, they use the posted rate.
Simply put, Bigger the difference between your contract and posted mortgage rate, bigger your penalty!
Pre-payments without the penalty clause is an important condition that can save you thousands.
For those of you who don’t know, this clause allows you to pay off your home loan faster by allowing you to increase your mortgage payment amount, without a penalty.
There are lots of people that don’t take advantage of this opportunity because they are never made aware of this feature.
Despite the excuse that its extremely difficult to save the extra money to make additional lump sum payments, a good mortgage broker is capable of creating a strategy which enables you to use this pre payment option efficiently in paying off your mortgage loan faster.
Home owners who exercise their prepayment option effectively not only end up paying their mortgages faster but also PAY LESS in interest dollars.
Think of at least one good reason why your bank should talk your benefits with prepayment!
Is it Collateral or Standard Lien?
In a Standard lien, the amount you are borrowing is the amount that’s registered.
You are allowed to access the rest of the equity at your own discretion.
With a Collateral liens, the registered amount may be between 100-125% of the property value, and the lender has both a promissory note and a lien registered against the property for the total registered amount.
Let’s talk about the advantage of a Collateral Mortgage – it has easy access to credit. Due to the fact that the mortgage is already registered for a larger amount than you loan amount, you can access additional funds in the future without any extra steps or legal fees.
Here are several downsides of collateral mortgages. Some times this type of liens make borrowers pay hefty penalties to get out of the term. There may be associated condition of arm length sale, just to get out of a contract or change a lender for better interest rates upon renewal.
Amortization is the time it takes to pay off your loan and is determined by the mortgage rates and terms your lender has provided you.
It is basically the reduction of your loan over its total term based on when and how much you pay. Presently (July 20, 2018) the maximum amortization for conventional mortgages is 30 years and high ratio insured mortages is 25 years.
Consumers have access to many payment periods. The general rule of thumb is the more payments you make the less you will pay overall in interest.
There are 3 ways you can use the amortization period to ideally reduce your monthly payment.
- Shorter amortization period can help you pay down debt quicker because you will have more total payments to make in less time.
- Increase Monthly Payment : Instead of just making regular payments, which will continue to increase your effective interest rate,
- consider making bulk payments.
What Options Do You Prefer to Have?
As you can see how you may get trapped into a mortgage contract and lose money. Before signing up for any mortgage rates, be sure to get a clear explanation as to what the terms and conditions are, of the product you are getting.
A clear explanation and transparency is part of our guarantee! This is why it’s essential to work with a mortgage agent/broker who is knowledgeable and trust worthy. Never hesitate to contact us for more information on rates in Canada.
Select the one willing to explain your home mortgage options above and beyond the mortgage rates and mortgage payments.
As you can see, there are a variety of questions you can pose about mortgages, how they affect your ability to buy homes, what rates to look for, and much more.
Remember to run these questions by specialists before signing up for a mortgage.
Always get answers that you feel best fit the information you have researched and read so that you make the correct decisions moving forward. Do not hesitate to contact us for more information on mortgage interest rates in Canada Ontario.
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