In this article, we will be looking at the mortgage type known as adjustable rate. If you have a real estate license you probably already know the basic information about this and other types of mortgages. If you don't and are looking into maybe a home or condo listings, we suggest reading our article on fixed rate mortgages first, as we will be drawing comparisons between the two.
Adjustable rate mortgages are aptly named, just like fixed rate. Instead of having one payment that stays the same every month, the adjustable rate mortgage payment will change from month to month based on the cost of interest in a given country. In Canada, commercial mortgage lenders and other mortgage specialists look to the Central Bank of Canada, which adjusts the interest rate during certain periods, dependent on the strength of the economy and other factors.
While the national interest rate will be one of the indices used to calculate a floating mortgage rate (another term for adjustable), all lenders tend to have their own criteria. Some may even be lower than prime, but you can rest assured that any mortgage Canada has to offer will be in favour of the lenders, at least statistically.
One of the interesting things about adjustable rates is that there is not a lot of information about just how successful they are or could be. This is because this type of mortgage was not available to most people in the country until the middle of the 1990s. What is interesting about this is that this type of loan is often cited as somewhat risky as interest loans could go much higher than expected, and people often cite the spikes in the '80s and '70s in these scenarios. However, adjustable rates were not in fact widely used during those time periods. This means that if you purchased your first condo several years ago, there are more options available for your new mortgage rate.
Most mortgage lenders will also provide a capped rate when home buyers elect the adjustable rate. This means that per month payments will only go to a certain level, and then are topped off. While this sounds good it does not always work out in the interest of the buyer, as making the payments does not actually cover the amount the loan rises due to interest each month.