Let’s Talk Interest.
Interest Rates are confusing, wouldn’t you agree? Let’s go through the different types of interest rates, terms, and what they all mean.
It’s time for you to Master Your Mortgage.
What is an Interest Rate?
The interest rate is the rate that your lender will charge you to borrow money from them during the term of your loan. While having a competitive interest rate is important to all consumers, when shopping for your mortgage, it’s important to understand that not all rates are made alike and on this page, there is an explanation for common mortgage terminology.
A fixed rate mortgage, means that your interest rate will stay the same for the entire term that you select for your mortgage.
A variable rate mortgage, means that your base rate, usually the lender’s prime rate, is tied to either a premium (increase) or discount (decrease). It is generally displayed as
Prime +/- (0.00) = Variable rate. An example P-0.50% = 2.45%. This type of rate is usually best for the type of client who is okay with the potential for periodic fluctuations in your interest cost.
Is similar to a variable rate, however the significant difference here is that your payment will change as the fluctuations in the prime rate changes. Why would someone want this rate you may ask? The main reason is that your amortization will remain the same and not be affected by changes in prime.
Refers to the base rate the lender is charging when discussing variable borrowing products.
Is the length of time that the lender calculates your payments over. For most mortgages the standard amortization is 25 years. The longer the amortization, the lower your payment, but the higher your cost of borrowing. The shorter the amortization, the higher your payment is, but the lower your cost of borrowing.
The length of time that your rate is guaranteed for. When discussing interest rates, most clients are discussing a 5 year term. That being said, mortgage terms can be 1,2,3,4,5,7 & 10 years. At the end of your term, we will look at new rates for your next term, assuming you haven’t paid your mortgage off!
A closed term mortgage means that your lender is promising you that your rate will stay the same for the term that you select, however, if you decide to break your mortgage with that lender, they will charge you a prepayment penalty.
An open term mortgage means that you can pay it off at any point in time without a penalty. An important note here is that most open term mortgages come at an increased rate,
Refers to the charge that the lender will apply when you payout your mortgage early. Different lenders will charge the penalty differently, so it is extremely important that you have an understanding of how your penalties are calculated. Is it interest rate differential or 3 months interest?
This is the rate that is used by lenders to qualify your file for the mortgage stress test rules.