In the realm of homeownership and mortgages, the quest for savings amid fluctuating interest rates can feel akin to children eagerly awaiting Santa Claus, only to face disappointment. Such has been the plight of floating-rate mortgage holders who, despite months of anticipation, were met with the Bank of Canada‘s decision on March 6 to hold policy interest rate steady, dashing hopes of immediate relief. This stance suggests that any significant rate reductions might not materialize until summer or later, leaving homeowners in need of rate relief in a precarious position.

For cash-strapped borrowers, the allure of variable-rate mortgages becomes apparent as they eye the potential for reduced payments, contingent on a decline in the prime rate. A hypothetical 100-basis-point reduction could lead to an approximate 9% decrease in payments for a 25-year amortization. However, this scenario doesn’t apply universally across all floating-rate mortgages, particularly with major banks’ offerings, which often feature fixed payments in their variable-rate mortgages (VRMs). For those aiming for payments that mirror the ebb and flow of interest rates, an adjustable-rate mortgage (ARM) becomes the go-to choice.

Understanding Adjustable-Rate Mortgage and Variable-Rate Mortgage

The distinction between VRMs and ARMs is crucial for potential borrowers. With a VRM, while your monthly payment remains constant, the allocation between principal and interest shifts with changes in the prime rate. ARMs, on the other hand, maintain a consistent principal payment, adjusting the total payment in line with prime rate fluctuations.

Insider Tips for ARM Hunters

Embarking on the search for an ARM can be daunting, given the myriad of lenders and their diverse offerings. Here’s a distilled guide to navigating this landscape:

1. Identifying ARMs: Locating lenders that offer ARMs can be challenging. A range of institutions, from credit unions to online financial platforms, provide these products, with notable names including CanWise Financial, Equitable Bank, and RMG. Leveraging a mortgage broker can simplify this process, offering a quick comparison across various lenders.
2. Weighing Pros and Cons with Banks: Banks like Scotia and National offer adjustable rates under the guise of “variable rates.” It’s essential to understand the nuances, especially regarding prepayment penalties and the advantages of linking ARMs with re-advanceable mortgages, which offer a line of credit that grows as you pay down your mortgage.
3. Compounding Interest: The compounding frequency of ARM rates can impact out-of-pocket costs, with monthly compounding generally resulting in higher expenses compared to semi-annual compounding.
4. Conversion Rates: Be wary of the fixed rates offered when converting from a variable or adjustable rate; transparency and fairness in these rates can vary significantly among lenders.
5. Portability Concerns: The ability to transfer your adjustable-rate mortgage to a new property without penalty is not a given and comes with several caveats that could impact your financial flexibility.
6. Penalty Pitfalls: Some lenders may calculate break penalties based on the prime rate rather than your discounted rate, potentially costing you more if you decide to terminate your mortgage early.
7. Cashback and Incentives: While some lenders offer cash rebates or other incentives, the generosity of these offers can vary, especially among non-bank lenders.
8. Qualification Guidelines: Lenders’ criteria for approving ARMs can differ widely, affecting everything from the maximum allowable mortgage size to the required credit scores.

Conclusion

While the Bank of Canada’s recent decision may have postponed the anticipated relief for floating-rate mortgage holders, the pursuit of an adjustable-rate mortgage remains a viable strategy for managing payment flexibility. By arming yourself with knowledge and possibly the assistance of a mortgage broker, you can navigate the complexities of ARMs and position yourself to benefit when interest rate cuts finally arrive. Remember, the goal is not just to reduce your interest payments but to secure a mortgage that aligns with your broader financial strategy and aspirations.

Maurice Kwok MBA CPA MA | Mortgage Broker | 416-618-9312 | 1mortgagebroker.ca | maurice@sherwoodmortgagegroup.com

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Source: Financial Post, March 7, 2024

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