Rates, What You Need to Know

Different Types of Rates Available Today, What You Need to Know

In this day and age there are several types of different rates.  I feel it is important for everybody to understand the many different types available and what the differences are.  Gone are the days of teaser rates, they have been replaced with what I call No Frills Mortgages and quick close rates, which I will explain later.  Rates are now just a way to try and lure potential clients.  I feel that mortgages are not just about the rate.  You need to understand a lot more to make sure you get the right mortgage.

First off, I think it is important to understand the differences between open and closed mortgages.  Open and closed simply refers to whether or not your mortgage is just that.  If your mortgage is open, it can be paid out anytime without penalty.  If your mortgage is closed, technically it cannot be paid out.  There are only a few mortgages in which you cannot pay them out penalty or otherwise.  Most can be paid out with the greater of 3 months interest or interest rate differential penalty.   The mortgages which cannot be paid out are what I call No Frills Mortgages.  Although open mortgages sound like the better option you are penalized by the rate.  If you can find a lender that will give you one you won’t see the low rates that are being offered on these.  I would say the majority of the mortgages arranged are closed.

Next having an understanding of Variable and fixed rate mortgages will help you determine which type is better for you.  Fixed rates are mortgages in which the rate is fixed.  By this we mean the rate doesn’t move.  With these mortgages your rate and your payment is guaranteed for the term.  There are several fixed rate terms available starting with 6 months then to 1year,2,3,4,5,7 and 10 years.  If you select a 5 year term then you won’t have to worry about rates again until the 5 years is up.  Variable rate mortgages are ones in which your interest rate is subject to change with prime lending rate.  What is meant by this is you are given a variable to prime, like prime -.1%, today your rate would be 2.90%, .1% minus 3%.  With the variable rate your variable to prime doesn’t change.  The banks’ prime lending rate is ultimately determined by the bank of Canada’s overnight lending rate.   The BOC (Bank of Canada’s) rate is determined by meetings in which it they decide to increase, decrease or leave it the same.  In most cases if the prime lending rate changes so does your payment on your mortgage to adjust for the increase or decrease in rate. There are some mortgages in which the payment does change.
 
Another type of rate available today is the quick close rate.  With this mortgage you are given usually 30 or 45 days to complete the mortgage transaction from start to finish.  In doing this your rate is usually discounted by at least .10%.  This type of rate is ideal on a refinance as the closing date most times doesn’t matter.  This might be difficult to achieve on a purchase as it will depend on when you can take possession of your house.  If you fail to close your mortgage within the quick close period you will be subject to the current non discounted rates which could be higher.  If you are provided this as an option then it is strongly recommended you work on providing the lender the necessary paperwork as quickly as possible so you have no trouble closing on time.  It is recommended you satisfy the lenders conditions 7-10 days prior to closing to ensure all is looked after on time.

Then there is a combo type rate.  This is a product often offered at the bank.  If you find the rate you are being offered by the bank is lower than what everybody else is offering it is possible they are offering you a combination of fixed and variable.  With this mortgage they will split your mortgage into 2 parts blending the rate somewhere in between.  When variable rates are low it allows lenders to produce a rate which appears to be lower than the average.  For example if you borrowed $200,000, the lender offering you a combo type rate might give you a variable @ prime, so 3% for $100,000 and a fixed rate @ 3.5% for the other $100,000.  This would produce a blended rate of 3.25%.  The main problem I see with this is when variable rates rise so does your overall rate.  This can be a good product if you are intending to do this and want to take advantage of both options.

The last type I is what I call a No Frills Mortgage.  I call them these because they are basically mortgages without any privileges.  Normally you can expect anywhere from 15% to 20% payment increases and lump sum payments for privileges but with these mortgages the most I have seen is 10%.  Also, they are closed.  Unlike some of the other closed mortgages the only way to get out of this mortgage is by selling your house. In addition almost all mortgages contain an option to port or are assumable and that is not the case with this one either.  So unless you are 100% positive that you are not going to need to make any changes within the 5 year term I wouldn’t recommend this one.  To get you interested in these they usually include deeply discounted rates on fixed 5 year terms.   

So, to conclude… there are many different rate options available.  It is important to speak to a trusted mortgage advisor prior to making any decision about rate.  There are quite a few questions to be asked prior to determining which one to go with;

What is the rate?
Is it a fixed rate or variable rate?
How long is the rate good for?
How long is mortgage amortized over?
Can I pay the mortgage out early?
What happens if I pay out my mortgage early?
What is the penalty?
What does IRD mean?
What are my pre-payment privileges?
Can I make a lump sum payment?
Can I increase my payments?
Can I make my payments weekly, bi-weekly, semimonthly or monthly?
Can I transfer my mortgage if I decide to buy a new house?
Is my mortgage assumable and what is involved?

If the person you are speaking to cannot answer any of these questions then I would recommend you contact somebody else who will ensure you are given all the necessary information.