Mortgage interest rate is easily one of the most talked about topics when buying a home. But, did you know - there are different factors to interest rate and how they may affect you?
Fixed vs. Variable Interest Rates
With fixed, your mortgage interest rate will not change during the term of your mortgage. It's great for consumers who may have a lower risk tolerance, tighter budget, or simply like to see their payments stay the same.
With variable, your mortgage interest rate may change during the term of your mortgage depending upon the Bank of Canada's prime rate fluctuates. Your interest rate may go up or down. This is a great option for consumers who have a higher risk tolerance, enjoy the other benefits of variable rate (ie. lower pre-payment penalty) and want the potential to save on interest.
There are benefits for each type of interest rate and should be discussed with your mortgage professional so you can choose the option that will work best for you now and into your mortgage term. Keep in mind your budget, income, future financial obligations and goals.
Fixed AND Variable Interest Rates
In some types of mortgages, your principle (amount you owe) may be subdivided into two types of interest rates. A part of the principle may be in a fixed rate and some may be in a variabe rate. This is common with a Home Equity Line of Credit (HELOC) type of mortgage. It allows you to have a portion with a fixed rate where you are always paying down the principle and some available in a "line of credit" account where you can access the equity if needed. This portion would be a variable interest rate and is secured by your home.
Compound vs. Simple Interest
Compound interest is calculated on the principal amount of your mortgage and on the accumulated interest. Most mortgage interest is calculated this way. That's the short version. If you want to read the long version click here.
In the variable portion of a Home Equity Line of Credit (HELOC) mortgage, and other types of loans, the interest is "simple", meaning it's calculated based on the balance of what you owe. That's the "simple" version - pun intended. Read here for the full details.
Wrapping it Up
Most people require a mortgage when buying a home. Real estate can be considered a good debt in the sense that it's an investment, you're building equity, the market is typically increasing in value and mortgage interest is one of the lowest interest rates you will have in your portfolio of credit accounts. Don't shy away from the disussion with your mortgage professional and be informed. Keep in mind the other higher interest debts you may be carrying - such as unsecured line of credit, auto loans, personal loans and credit cards - and how you may decrease the interest paid there as well.
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