Mortages are complicated beasts -- finding the right one can be a challenge. The best step a potential home buyer can make is to consult a mortgage broker or representative to make sure they get the product that is right for them. Below is some basic information in order to get you started.

Background:

When you arrange a mortgage with a bank, your mortgage agreement will be for a specified amount of time. This is called the 'term', and is usually from 1-5 years in length. At the end of that term, you will renegotiate your agreement with the bank, and enter a new term. One of the main items you will be negotiating with the bank is the rate of interest you will owe them on the amount you have borrowed (called the 'Principal').

When looking at rates, you may have noticed that there are different types of rates. You can get a fixed rate, a variable rate, or a blended rate.

Fixed Rate:

A fixed mortgage rate is a rate that is fixed over the length of the term. For example, if you arranged for a fixed rate if 4.35% over 5 years, that would mean that you would be making the exact same payment each month for the next 5 years. Fixed rates are always higher rates than your other 2 options. People who decide on the fixed rate usually do so because they want a predictable payment over the entire term.

Variable Rate:

A variable interest rate is a rate that changes over the life of the term. This rate will go up and down as the bank's prime interest rate goes up and down. Variable rates can be expressed in absolute terms (2.40%) or more accurately in relative terms (prime +0.40%). Using this example over a five year term, your rate could start at 2.40%, but then can move up multiple times over the term of the mortgage with the bank's prime rate. That means if the bank's prime rate moves from 2% to 4%, then your variable rate would move up to 4.40%. Your monthly payments would increase accordingly. Variable rates are always lower than fixed rates, and 95% of the time a buyer ends up ahead over the term if they decide to go with variable. The disadvantage is that you do not have the security of knowing that your monthly payments will be the same for the next 5 years.

Blended Rate:

Blended rates are a newer product on the market, and are just as they sound -- they are a blend of fixed and variable rates. What the bank will do is lend you a portion of your principal at a variable rate, and the rest at a fixed rate. This will effectively give you a little bit of security against rising interest rates, but not as much as if you chose a fixed rate. You would also get an interest rate that is lower than the fixed rate, but not as low as the variable.

There are many different things to consider when choosing the mortgage product that is right for you, an the interest rate is just one of them. It is however one of the more important aspects of your mortgage. A change of just a quarter of a percent can make the difference of hundreds of dollars per month. If you have any more questions at all about mortgages and interest rates, don't hesitate to shoot me an e-mail, or give me a call. The better you understand mortgage rates, the more money you will save!

Morgan Keating, Realtor