Variable Rate Mortgages

© 2001 Ottawa-Carleton Mortgage Inc.

This is one of the most innovative mortgage products available, it is also one of the most misunderstood mortgage products. The variable rate mortgage (V.R.M.) has become a very popular choice amongst our clientele.

This product caters to individuals who believe that interest rates will either remain stable or decrease in the near to mid future. It is also a great alternative to any short-term mortgages - from six months to two years.

There are three main components to this product that consumers should be aware of.

1. Ongoing "prime minus" feature.
   
2. The opening or "teaser" rate.
   
3. Lock-in feature of each mortgage company.

Currently, there are eight (8) different and distinct Variable rate mortgage products in the market place. All of this choice generally leads to confusion among most prospective clients, and that is exactly what the banker's want-Confusion-They make it difficult to distinguish between products. But like all products that you purchase, one product is better then the rest, and we will mathematically prove which one is the best for you.

The first component of the mortgage, what we refer to as the "prime minus" feature, follows this simple definition. "The percentage below the banks prime lending rate which a mortgage client is charged on a on-going basis."

For example, if the bank's prime lending rate is 7.0%, bankers will vary their formulas from prime minus .25% (6.75%), to prime minus .50% (6.50%). Every banker is different, but mathematics leads us to the correct solution. A quarter point difference (.25%) over a five-year term can certainly make a HUGE difference!

The second component, the "teaser rate", is the interest rate charged for the first three to nine months. This rate is intended to lead a client or persuade a client to choose a particular banks product. A good rule of thumb to follow is that if the teaser rate is low (1.9% to 4.9%) it is likely the worst Variable rate product in the market place. In other words, if it seems too good to be true, it more then likely is the case. This is usually the case, as bankers with the lowest teaser rates have the highest, ongoing rate "off prime" rate as discussed in the previous paragraph.

The last component to ask yourself is simply this "down the road, if I want to lock in to a fixed 3,5, or 10 year term, what rate discount will I receive?" One of the most popular features of the Variable rate mortgage is that at any time, a client is able to lock in their mortgage to a fixed term. But BEWARE of this feature! 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! Only two of the eight mortgage companies, which offer this product, also state the interest rate discount available when you trigger this "lock-in" feature.

In many respects, this mortgage appears complicated. With the assistance of one of our Mortgage Broker/Mortgage Agents, we can guide you through the maze and ensure that you receive the BEST product available. Mathematics dictates the correct solution with this type of product. Ask an Ottawa-Carleton Mortgage Broker/Mortgage Agent to show you this information, and make an informed decision.