You know about fixed and variable mortgages, but did you know there are 2 types of variable mortgages? Static payment variable mortgages and adjustable rate mortgages (ARM).
Both these mortgages are influenced by changes in your bank’s prime lending rate and the Bank of Canada’s decisions on benchmark interest rates. However, their response to fluctuations in the prime lending rate differs.
Static Payment Variable:
- In the event of a change in the prime rate, the payment on a static payment variable mortgage remains constant. However, the allocation of the payment between interest and principal adjusts accordingly.
- If the prime rate increases, more of the payment goes towards interest and less towards principal, resulting in an extension of the remaining amortization period.
- Conversely, if the prime rate decreases, less is allocated to interest and more to principal, reducing the remaining amortization period.
- Generally, static payment variable rate mortgages are offered by major banks.
Adjustable Rate Mortgages:
- With an ARM, when the prime rate adjusts, the mortgage payment is recalculated to maintain a consistent proportion between interest and principal, thereby keeping the amortization period unchanged.
- If prime goes up, your payment goes up.
- If prime goes down, your payment goes down.
- Generally, ARMs are offered by monoline lenders.
As we anticipate a potential decrease in the prime lending rate later in 2024, there is renewed interest in variable and adjustable rate mortgages. To help in the decision-making process between these two products, consider the following factors:
- Opting for a static payment variable mortgage could expedite mortgage repayment in a declining rate environment. However, if your monthly cash flow is stressed this won’t lower your payments.
- If reducing monthly payments is a primary objective, an adjustable rate mortgage may be preferable.
- It’s important to note that adjustable rate mortgages typically come with significant prepayment privileges. In the event of a prime rate decrease, borrowers can utilize these privileges to maintain their payment at its original level, accelerate mortgage repayment, and retain greater control compared to static payment variable mortgages.
Luck for you, I can offer both these products so we can find the best mortgage to match your finances and your goals.
Hi, I’m Jill, your mortgage pro. I am here to make the world of mortgages less confusing so you can feel confident in your financial decisions. Through my blog, I aim to provide you with the knowledge and guidance you need to make informed decisions. Your financial peace of mind is my top priority.
