This trend has been driven by the current low interest rate environment and the fact that VRMs usually offer a lower interest rate than fixed-rate mortgages at the start of the term. However, there are a number of factors that must be taken into consideration when deciding whether or not VRMs are right for you.
Firstly, it is important to understand how VRMs work. VRMs typically track the prime lending rate, meaning that when the Bank of Canada raises their key lending rate, your payments will also increase. This can lead to higher payments in the short-term; however, if interest rates remain low for an extended period of time, you will also benefit from the lower interest rate. There is also some risk associated with VRMs, as you could find yourself in a situation where you’re unable to make your mortgage payments if interest rates rise too much.
Secondly, it is important to understand the features of VRMs. Usually, a VRM will include a cap on the maximum interest rate, meaning that even if rates continue to climb, you won’t have to worry about making payments that are too high. Additionally, some lenders offer discounts on the default interest rate, reducing your overall cost of borrowing. The length of the term of the loan will also need to be taken into account, as longer terms may offer reduced monthly payments but will also mean paying more in interest over time.
Finally, it is important to evaluate your financial goals before deciding whether or not to choose VRMs. Generally, VRMs will be a good choice for borrowers who plan to pay off their mortgages quickly and are able to handle possible payment increases. On the other hand, VRMs may not be the best choice for those with longer terms and lower incomes, as they are at higher risk of getting into difficulty when rates go up.
Overall, variable rate mortgages offer Canadian borrowers an opportunity to access the housing market with lower interest rates at the start of the term. However, there are a number of factors that must be taken into consideration before taking the plunge, including understanding how VRMs work, evaluating the features they offer and assessing your financial goals. Ultimately, the decision to go with a VRM should be weighed carefully to ensure that it works towards your individual goals.
In recent years, buyers in the Canadian housing market have increasingly turned to variable rate mortgages (VRMs) as a way of affording more expensive homes. This is due to the current low interest rate environment, as VRMs usually offer a lower initial rate than fixed-rate mortgages. Before making the decision to go with a VRM, however, it is important to understand how these mortgages work, the features they offer, and how they fit your personal financial goals.
VRMs typically track the prime lending rate, meaning that when the Bank of Canada raises their key lending rate, your payments will also increase. This can result in higher payments for the borrower in the short-term, although the upside is that if interest rates stay low for an extended period of time, the borrower will benefit from the lower rate. It is important to note that there is some risk associated with VRMs, as borrowers could find themselves unable to make payments if interest rates continue to rise.
Certain features, such as the inclusion of a cap on the maximum interest rate,can soften the effect of rising rates on borrowers. Some lenders also offer discounts on the default interest rate, reducing the overall cost of borrowing. The length of the loan term should also be taken into consideration, as longer terms may reduce monthly payments but will also lead to higher interest payments over time.
Ultimately, the decision to go with a VRM should be made after carefully considering your personal financial goals. Those who plan to pay off their mortgages quickly and have the ability to handle potential payment increases will typically benefit from a VRM. However, individuals with longer loan terms and lower incomes may need to forego a VRM, as they are more likely to get into difficulty when rates rise.
This article was contributed on Jun 24, 2023
