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Ideas & information.

  • Mark Panizzon

Variable Rate Mortgages vs. Adjustable Rate Mortgages

In the realm of Canadian mortgages, the choices can be overwhelming. Let's delve into the distinctions between two popular options: Variable Rate Mortgages (VRMs) and Adjustable Rate Mortgages (ARMs). Both play a significant role in the Canadian mortgage landscape, and understanding their nuances can empower you to make informed financial decisions.

Floating Rate Mortgages, often referred to as variable rate mortgages, come with interest rates that fluctuate based on changes in the prime lending rate set by the Bank of Canada. The prime rate is influenced by various economic factors, such as inflation, employment rates, and overall economic health.

Here are key points to consider with floating rate mortgages:

  1. Interest Rate Fluctuations: The interest rates on these mortgages can change during the mortgage term, impacting your monthly payments. While this may lead to potential savings during periods of declining interest rates, it also introduces an element of uncertainty.

  2. Potential Cost Savings: In a low-interest-rate environment, floating rate mortgages can offer cost savings compared to fixed-rate mortgages. Borrowers may take advantage of lower rates and pay less interest over the life of the mortgage.

  3. Risk Tolerance: Floating rate mortgages are suitable for individuals with a higher risk tolerance who can navigate potential fluctuations in monthly payments. They may be ideal for those who believe that interest rates will remain stable or decrease in the short to medium term.

Key difference between Variable Rate Mortgages (VRM's) and Adjustable Rate Mortgages (ARM's):

Adjustable Rate Mortgages, similar to Variable rate mortgages have interest rates that can change during the mortgage term. However, the key difference lies in the mechanism determining these adjustments. ARM's payments change when rates change, keeping the amortization the same. So, these mortgages can be considered the risker option in terms of cash flow and month to month changes since you have to have some flexibility in your budget to handle potential higher mortgage payments when rate do go up. With Variable rate mortgages, the payment does not change during the term if rates change, only the amortization will adjust and either expand or contract depending on if rates go up or down. If rates go up, the amortization will increase and vice versa. This key distinction is very important when considering floating rate mortgages since one gives you a little more flexibility if rates change, where the other does not.

Choosing the Right Option: Selecting between VRMs and ARMs depends on various factors, including your risk tolerance, financial goals, and market expectations.

In the dynamic landscape of Canadian mortgages, understanding the differences between Variable Rate Mortgages and Adjustable Rate Mortgages is crucial for making informed financial decisions. Both options have their merits and drawbacks, and the right choice depends on your individual circumstances and market expectations. As you navigate the mortgage market, consider consulting with a licensed mortgage broker for expert guidance aligned with your financial goals.

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