Homeowners and buyers everywhere have a love/hate relationship with mortgages. While no one exactly “loves” having a loan that takes years to pay off, we can all appreciate the fact that it allows us to buy a home. When interest rates fluctuate, as they do from time to time, people can get nervous about their mortgage, especially when buying a new property or when the time has come to refinance.

A single percentage point can mean a higher payment or taking longer to finally celebrate the day you become mortgage free. In this post, we’ll take a look at the different types of mortgages available and how changing interest rates can affect them.

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Are you thinking about buying a new home in Niagara? The following resources will help you get off to a great start:

• What’s a Buyer’s Agent? Do I Really Need One?
• Why People are Moving from Toronto to Niagara
• 6 Tips For First-time Buyers

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Mortgage Terms to Understand

Before we dive deep into the nitty gritty about mortgages, there are a few terms that will be helpful to understand.

Bank of Canada: This is the central bank for the entire nation. It’s their responsibility to maintain a stable economy and manage the currency supply circulating in the country. They are also the ones who determine whether target rates increase, decrease, or stay the same.

Target rate: The central interest rate used to influence monetary policy. A higher target rate can be used to curb inflation. Alternatively, the Bank of Canada may lower the rate during a slow economy to encourage consumer spending. Any change to the target rate will influence the prime rate, which is what banks use to calculate the interest rates for their clients. When the target rate rises, so will variable mortgage rates.

Government bond yield: This is the interest rate at which the government borrows money. Since government bonds are one of the most secure investments, they tend to produce a much lower return for investors. In Canada, fixed mortgage rates are tied to bond yields rather than the Bank of Canada rate. Their influence is inverse. When bond yields decrease, mortgage rates increase and vice versa.

Amortization period: This refers to the length of time it will take to pay off your mortgage loan in full. In Canada, the maximum amount of time allowed when placing a 20% down payment is 25 years.

Mortgage term: A mortgage term is the length of time your current mortgage contract is in effect, which can vary but is typically 5 years. When your term expires, you will need to renew your mortgage. 

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Types of Mortgages in Canada

Now that you understand the basics, we can move on to the different types of mortgages in Canada. Even though financing is usually a dry topic, there is some excitement because understanding your options allows you to purchase what will potentially be the most significant asset you will ever own, your house! Here’s an overview of fixed-rate and variable-rate mortgages.

Fixed Rate Mortgages

A fixed-rate mortgage allows you to lock in a specific rate at the time of approval that carries over for the duration of the term, usually five years. When the Bank of Canada announces a new hike to the target rate, some homeowners and potential buyers begin to panic. In a worst-case scenario, there may be worried whispers about whether they will still be able to afford the home as borrowing costs creep higher and higher. But remember that your fixed-rate mortgage isn’t tied to the Bank of Canada, so you can breathe a sigh of relief. Plus, you’ve already locked in your rate and no one can increase it on you.

• What are the downsides of a fixed-rate mortgage? Since your rate is locked in, you won’t save any money when interest rates fall. It’s a price you pay for the security of predictable installments.
• Who should sign up for a fixed-rate mortgage? If you’ve purchased at the midrange or top of your budget, a rate increase could mean the difference between affording your home and not being able to carry your monthly costs. Alternatively, if you like the security of knowing what your payment will be every month, a fixed-rate mortgage is likely your best option. And when interest rates are at or near an all-time low, it’s often smart to lock it in before it begins to rise again.

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Variable Rate Mortgages

A variable rate is just like it sounds – it varies. Variable mortgages are often lower than fixed rates, but you must remember that they can rise and fall whenever the Bank of Canada decides to make a change. The advantage is that you’ll save money and potentially pay down more of the principal of your loan when interest rates fall. The downside is that higher rates will either increase your monthly payment or lengthen your amortization period. In addition, it can be a bit of an emotional roller coaster, never knowing what might happen next.

• When should you consider a variable rate? During times of high interest, many people will choose a variable mortgage in the hopes that the rates will soon decrease. Obviously, there is a level of risk involved here. Rates may fall as you expect. Or the opposite can happen and they will continue to rise. 
• Who should choose a variable rate? Are you the type of person who doesn’t mind taking risks and is willing to shoulder higher costs in the short term? If so, a variable rate could save you many thousands of dollars over the course of your mortgage. And if rising interest rates are out of control, you can always switch to a fixed mortgage later.

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Interest Rates Are Not Forever

Interest rates rise and fall, and you should never rejoice prematurely or despair unnecessarily. It is a cycle that homeowners and buyers must adjust to, and the key is to ensure that you establish a realistic budget with a cushion for the unexpected. An experienced real estate team and a mortgage professional can help you navigate the current conditions to achieve your goals on a timeline that works for you.

Interest rates and mortgages may be a sore point for many people, but it’s important to remember that they are always subject to change. That’s why you’ll often encounter this saying, “Marry the house, not the rate.” In other words, the rate will not last forever, but the benefits and joy of owning your home will!

Do you have questions about buying or selling a home in the Niagara region? Our local experts are happy to help you get started! Reach out at 905-717-8529 or email admin@thebarryteam.ca for more information today.