With the Canadian bank prime rate at historical lows, you could get a variable rate mortgage (VRM) for as low as 2.25% which is the equivalent of bank prime. The need for accurate comparisons of these products between financial institutions becomes increasingly important. While traditional closed term mortgages in Toronto are easy to understand and compare one with another the adjustable-rate mortgage (ARMs) can take a great deal of understanding to effectively compare the product between institutions.
The problem with evaluating adjustable-rate mortgages stems from two things. First, comparing the effective prime discount (or cost of borrowing) requires a relatively complex (for the average consumer) financial calculation for many of the product offerings. Second, to compare the privileges and features and the resulting impact, you have to understand what questions to ask.
Buyer Beware: 3 Factors to Make the Right Mortgage Decision
Understanding that the majority of consumers do not have the knowledge or ability to do the two things that I have just mentioned, many financial institutions are now re-capturing the margins that they once received from naïve consumers on closed term products by putting them into adjustable-rate mortgages that compromise rate, privileges, or both. Before you sign for the biggest loan that you will likely ever have in your life, here are some things that you should definitely know in advance (and as always get them in writing):
Understand the conversion option and rate discounts:
Many people sell clients on the idea that you can convert an adjustable-rate mortgage to a closed term mortgage without any penalty at any time so what? Know exactly what the rate discount will be if you convert. If it costs you three months interest to switch to another financial institution they have got you trapped when you go to negotiate your closed term rate. Make sure that when you convert to a closed term you will get a good discount on the closed rate otherwise be prepared to stay with the variable until it becomes open or renews.
Know how rate changes will affect your payments:
Some adjustable-rate mortgages have payments that adjust as prime moves while others do not. When prime goes up and your payments stay the same, then the portion of your mortgage payment that goes towards principal is decreased. This means that your amortization period is also extended. Do you want a mortgage that takes 35 years to pay off? Also, if the payment adjusts regularly – will this keep you awake at night?
A Cautionary Tale… with a Big Payoff
Please don’t misunderstand my caution, I think adjustable-rate mortgages are great products that have finally received the attention they deserve. ARMs are to the mortgage what stocks are to investing – that is to say that staying with them should make you better off financially in the long run. In a time when rates are at historical lows and are expected to stay that way for some time, ARMs will give you a lot of flexibility. But truthfully they are a product many of the financially savvy have been using for years.