What Features To Look For in a Variable Rate Mortgage

With interest rates poised to drop over the next few months, variable rate mortgages have been gaining popularity. For individuals looking to purchase or refinance their mortgage, it is important to understand what features to look for. Here are the top three:

1) Ability to lock-in your mortgage and the lender’s best interest rate - Most lenders allow you to convert your variable rate mortgage to a fixed (i.e., locked-in) mortgage. However, not many lenders guarantee whether you will get their best interest rate or their posted rate when you convert. You need this guaranty. Rates can sometimes move quickly so you don’t want to have to haggle with your lender for their best rate (which could be up to 1.5% lower than the posted rate) when rates are moving up. At this point in time, your options are limited since it can be costly to switch to another lender.

2) Introductory rate - Some lenders offer mortgages with an introductory rate. There are pros and cons to taking a mortgage with an introductory interest rate. Your payments are lower initially, then increase after a few months. To some, this is a benefit. However, there is a cost to this. I’ve had the opportunity to review a major bank’s introductory rate offer. For this scenario, the borrower was offered an introductory rate of Prime less 1.01 for the first 90 days and Prime less 1/4 for the remainder of the term. My offer was a variable rate at Prime less 0.6%. I compared the total interest cost of each offer and it turns out that the mortgage with the introductory rate would cost the borrower approx. $3200 in interest over 5 years.

3) Interest Rate Compounding - Standard mortgages are compounded on a semi-annual basis (in simple terms, interest is charged on interest every 6 months). There are some variable rate mortgages where the compounding is monthly. Monthly compounding is more costly.

Getting the best mortgage is all about getting the best advice. This is advise you can only get from your mortgage broker.