Mortgage Rates Explained
The world of mortgage rates can seem like a minefield to many people. How do you get the best rate from your Alberta mortgage broker? First, we need to understand what a mortgage rate is.
Definition of Mortgage Rate
Basically, the mortgage rate refers to the interest that you pay for the money you have borrowed. It’s a fee charged for the use of that money borrowed. The interest rate, or mortgage rate, can be a fixed rate mortgage, adjustable rate mortgage, or variable rate mortgage. Whatever this rate is will have a substantial impact on the amount being paid back every month.
How Are Mortgage Rates Set?
It’s mainly the housing market that sets the mortgage rate, alongside the Bank of Canada and other large banks’ influence. One of the most influential is the residential mortgage bond market. So, the higher the yield of mortgage bonds, the higher the mortgage rate.
Regarding the types of mortgages, it is usually the fixed rate options that have the higher interest rates. This is down to a fixed rate locking in a particular rate of interest that cannot be increased throughout the mortgage’s term, regardless of a rise in mortgage rates. Also, longer-term mortgages tend to have a higher rate of interest than shorter-term mortgages.
Fixed, Adjustable, and Variable Rates
A fixed rate mortgage, as explained earlier, locks in a specific interest rate for the entirety of the mortgage term. The benefit with this option is that there will be no surprise changes should the interest rates suddenly shoot up. However, should they drop lower than your fixed rate, you may end up paying more than you would with the lower market rate.
An adjustable rate mortgage means that both the interest rate and mortgage payment amount will vary based on the conditions of the housing market. You generally start with a lower rate of interest that will change after a period, for example 5 years. This is a good option if you plan on moving before that 5 year period is up.
A variable rate mortgage means your mortgage payments and interest rate fluctuates depending on the housing market. This one is considered a bit risky because you can end up paying more if the interest rates shoot up. Your Alberta mortgage broker may start you off with a low rate for taking the risk. This is an option that isn’t always viable for those who are on a strict budget though. Your Alberta mortgage broker can guide you on the best option for your situation.
Conventional and High-Ratio
Conventional mortgages are those where the buyer has paid at least 20% of the homes purchase price and the lender pays 80%. A high-ratio mortgage comes into play when you make less than the 20% down payment of the value of the home. This means that the lender covers up to 95%. A high-ratio mortgage requires insurance against any payment defaults, but the interest rates tend to be lower.
Open and Closed Mortgages
Closed mortgages mean you pay the same amount every month for the entire mortgage term. This is a good choice if you need a fixed payment schedule and you don’t plan on moving or refinancing your mortgage before the mortgage term ends.
With an open mortgage, you can make a lump sum payment at any given time, and it can be paid off before the term without being charged a penalty. Open mortgages are a good option for those who plan to sell their homes in the near future, or who want to have the flexibility of making large lump sum payments. These mortgages tend to have a higher interest rate than a closed mortgage.
There are many options where mortgage loans are concerned. Speaking with an Alberta mortgage broker means you will get a deal that suits your needs and situation.