The variable rate mortgage (V.R.M.) has become a very popular and aggressive way to finance your mortgage. Popularity of variable rate mortgages has continued to rise (29 per cent in 2004 vs. 11 per cent in 2001)*. The 2 forms being either “open” or “closed” offer to the mortgagor benefits and control far greater than the conventional “fixed” mortgage financing.
Mortgage Financing: Floating Your Way to Prosperity
Written By: Moshe A. Milevsky, Ph.D.
Associate Professor of Finance
Schulich School of Business
York University, Toronto
The first component of the mortgage, what we refer to as the “prime minus” feature, follows this simple definition: the “percentage below the bank’s prime lending rate which a mortgagor is charged on an on-going basis”.
For example, if the institution’s prime lending rate is 5.0%, the variable formula varies from prime, to prime minus 0.XX% (5.00% minus 0.XX%). Every institution as well as the borrower is different. That is where we offer our experience and services to inform and educate the client(s) to all options and benefits.
The second component, the “teaser rate”, is the interest rate charged for the first three to twelve months. This rate is intended to lead a client or persuade a client to choose a particular institutions product. A good rule of thumb to follow is that if the teaser rate is low diligence would dictate to compare the “total package” over the long term. In other words, if it seems too good to be true, it more than likely is.
One of the most popular features of the Open Variable rate mortgage is that at any time, a client is able to lock in their mortgage to a fixed term under certain conditions and constraints with no penalty. Most bankers will not fully discount the interest rate once you are already their client, and guess what? You will not have any choices or options!
The mortgage decision is not an easy one to make at the best of times. The Variable vs. Fixed mortgage decision is at the head of the list. Once the direction is determined, then the process is only a matter of fine tuning the details to the client’s best interest.
Contact us for further information and guidance.
IFID Centre Research Report
Copyright 2001 by M.A. Milevsky
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*CMHC (May 2005)