Before you begin shopping around for a mortgage, it’s important to understand the basics about mortgage interest rates and how they work. We’ve put together some information that we hope can help guide you in the process.
When banks and lenders offer a fixed rate mortgage, it means the interest rate stays the same and will not change for the entire term of your loan. The upside to this is stability and predictability. Your monthly payment will remain the same throughout the lifespan of the mortgage, so if the posted rate goes up or down, you are not affected. Many like the peace of mind this brings, knowing that the amount they’ll pay monthly is steady and unchanging.
With a variable rate your mortgage interest rate is not locked in. This means that your monthly payment will change over the course of your loan, depending on whether the posted rate goes up or down. Whenever the rate changes, your bank or lender will recalculate your monthly payment, which is the amount you’ll pay until the next interest rate adjustment happens. With a variable rate mortgage, lenders often offer lower interest rates for the first few years of your term. A variable rate can be a great option if you are planning on staying in your new home for only a few years.
Protected Variable Or Capped Rate
A protected variable or capped rate is a twist on the variable rate just discussed. It offers a form of built-in protection, so that while your posted interest rate can go up or down throughout the life of your mortgage, you are protected from extreme highs. There is a limit or cap stated in the agreement, so if the market suddenly goes haywire and the interest rate skyrockets beyond a specific percentage, you are protected.
How Mortgage Interest Is Calculated
While most of us understand that a low mortgage interest rate is ideal, that’s just one of the factors to take into account. Another is how often interest is compounded. By law, fixed rate mortgages in Canada are compounded twice a year; this means that unpaid mortgage interest is added to the principal two times in a calendar year. To be sure you can afford the monthly payments, we recommend using a mortgage loan calculator, which can be found easily online. It will outline what your exact interest rates and payments will be.
Principal Vs. Interest
Every mortgage has two parts: the principal (amount borrowed) and the interest charged to borrow that money. Over the course of your mortgage, the amount that you pay towards the principal changes. At the beginning, homeowners typically pay more towards interest. As time goes by, the balance shifts, and while your payment amount remains the same, more of your money goes towards reducing the principal. The goal is to pay off the principal as quickly as possible, as this will reduce the overall amount of interest paid.
We hope this information has been helpful and that you have a good grasp of how mortgage interest rates work. Thanks for reading and don’t forget to follow the Gemterra Developments blog for more great information about financing your home.