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5 Year Variable definition for Red Deer Home Owners
Most Red Deer residents have heard of variable rate mortgages, but many have never considered one. That’s understandable given that two thirds of Red Deer mortgage holders have a fixed rate mortgage.
What Is a Variable Rate Mortgage?
A variable rate mortgage is one that varies. It fluctuates with the prime interest rate. This number isn’t pulled out of the air. It is the prime interest rate, an interest rate based off the overnight lending rate at the Bank of Canada. The interest rate that the Bank of Canada lends money to banks and other financial institutions is the basis of that calculation. On top of that is the return the financial institution has to receive to cover their expenses, their risks and earn a profit. The variable interest rate is generally stated as a prime plus or minus a percentage.
Variable Rate Loan Terms
Most Canadians have a five year mortgage term. This means they have to renew the mortgage after the end of the five year contract, not that they’ve paid off their house in that time. There you can have a loan with a term of one, three, five or more years. (You could even renew your five year variable rate mortgage to an annual one if you’re afraid you’ll be moving soon.)
The five year fixed mortgage rates are typically driven by the five year government bond yield whereas variable is driven by the overnight lending rate at the Bank of Canada.
How 5 Year Variable Mortgage Rates Are Defined
We mentioned that variable mortgage rates are based off the prime rate. A variable rate that is equal to the prime rate will say the prime rate. A variable rate mortgage could be quoted as prime – 0.8%. In that case, the interest rate on the mortgage is 4.2% if the prime rate is 5%. And you would pay 4.2% interest on the loan balance as long as prime rate remains at 5%
the variable interest loan will alter how much interest you pay. However, this doesn’t mean that your house payment will necessarily skyrocket. You can have a conventional variable rate mortgage where you pay a fixed sum applied to principal plus an interest portion based on that quarter’s interest rates. If interest rates go down, a larger portion of the payment goes toward the balance. If interest rates go up, you may end up only making principal payments. However, interest rates would have to go up incredibly high for the lender to demand more than the set monthly house payment. Borrowers hope interest rates go down, because the principal would be paid off that much faster. They end up with a shorter amortization period.
The Popularity of Five Year Variable Mortgages
How popular are variable rate mortgages? Nearly a third of Canadian mortgages are variable or adjustable rate. The five year term is the most popular loan term for both variable and fixed rate mortgages. It is considered the compromise between the extreme options, one and ten year terms.
How to Compare 5 Year Variable Rate Mortgages
Variable rate mortgages will always alter the interest you are charged. If you pay a fixed amount every month, you could end up paying less principal against the mortgage is interest rates go up. That could extend the length of the loan. Or you may pay the loan off faster, when interest rates fall. However, not all lenders calculate interest rates the same. Lending institutions can vary by several fractions of a percent though they are all based on the prime rate. The best part of a variable mortgage rate is you can always jump to a fixed for the existing term without a penalty so this gives you a little security if you decide you want to take a fixed. Call your devoted Red Deer Mortgage Brokers at Whalen Mortgages Red Deer to discuss your options today! 587-315-3525