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The AC Lending Weekly

To Fix or to Variable that is the question!

(Part 3)

To end off this trilogy we will review the variable side of rates. Variable rates are directly related to the ‘Prime Rate’.  The prime rate is dictated by the Bank of Canada though ultimately a variable rate is set by the big 5 banks and what kind of premium they want to charge the consumer.  There are 2 types of variable terms-Open and Closed.

The closed variable terms come with a penalty if you break the mortgage contract (Usually 3 months interest).  Again, it is important to note that there are products out there that carry a greater penalty for a better up-front rate.  I highly suggest speaking to me before taking this product. In my experience most times it is not worth it, and you should make sure you are well informed. The closed variable terms typically come with a discount on the rate. For example: Prime-1% or Prime-.50% depending on the lender you choose.    The prime rate will fluctuate during the term of your mortgage but the ongoing discount you receive will not.  This means your payments will fluctuate up and down over the mortgage term when the Bank of Canada makes changes to the prime rate.

The ‘other’ variable term is the open variable, this product does not come with a penalty.  It does however come with a much higher rate to mitigate the potential loss of income to the lender if you break the mortgage. (ie: Prime +0.80% Prime+1%).  Unless you in a position where you must renew the current mortgage and know you also must sell, getting charged this premium does not make sense.  The interest costs alone would offset the 3-month interest penalty that would accompany a closed variable term within a year.  Alternatively, to an open variable, you can also get a credit line against your property. The current maximum you would be able to borrow as a credit line facility would be 65% of the property’s value with an overall maximum loan to value of 80%.   The upside is you are only paying interest on what is outstanding, exactly how a regular unsecured credit line would work. You also now have access to a much larger revolving credit facility if you never needed and there’s no penalty to pay it out in full.

The Bank of Canada meets 8 times a year and determine the prime lending rate based on the overall economic situation in Canada.   Once you have chosen the variable rate, you can set the schedule in you calendar to stay on top of the status of your interest rate.

“I hated every minute of training, but I said. Don’t quit. Suffer now and live the rest of your life as a champion”

 Muhammad Ali

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