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FAQs Regarding Fixed Rate Mortgage Canada

June03
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Should one take a fixed rate mortgage Canada?  Or should it be variable? This is the number one question that intrigues everybody’s mind today. The subprime fiasco has gone away, but it has left behind ugly scars, and there is a high degree of skepticism. This is in a way good as people are now keen to know the effective interest rates on their policies. There are not many bad loans around, and there is a general tendency to dig deeper and gain knowledge of the mortgage products than was the norm.

This article has been written to inform home owners about some facts relating to their mortgage, and it tries to answer some of the basic questions that come to everybody’s mind:

Question number 1: Fixed rate versus variable rate mortgages?

Well, at this point of time it is better to opt for a fixed mortgage rate in Canada. The reasons being:

  • No Surprises: Fixed rate mortgage Canada relieves you from worrying about the interest rate movements. No matter in which direction the interest rates move, your payments will remain what you chose them to be. Do not get trapped by people claiming that if the interest rates will fall, you may benefit with a variable rate. The disadvantages of having a variable rate time bomb in your mortgage have been well-orchestrated by the recent unfolding of the subprime mortgage crisis in United States.
  • Interest Rates Low: Buying a fixed mortgage rate Canada will make even more sense for the simple reason that interest rates are possibly at their rock bottom. The prime rate stands at a low of 2.25%. It will not matter even if it falls down. It will not reduce your mortgage payments considerably. This is because the fall is expected to be only of a few percentage points unless money is available without interest.

But there is a great chance of the interest rates  going high, which can take your mortgage payments skyrocketing along with it. So the deal is like this: First, you will have to assume the risk and bear the stress of wondering where the interest rates are heading and how they might affect you. Second, if you lose, you lose big, and if you win, you make minuscule gains. Heads I lose a dollar, and tails I win a dime. This is equal to considering equal probability. Most of the industry experts opine that, in the long run, interest rates will not stay this low or we will be in another mega asset bubble. So it is better to take a fixed rate mortgage Canada, although it might look a little expensive, it really isn’t.

  • The Expensive Cover: Prima facie, if you go to buy a fixed rate mortgage Canada, you will find that it is a few percentage points more than the variable rate. This may lead you to the faulty conclusion that a fixed rate mortgage Canada will be more expensive for you. Nothing can be farther from the truth.

While reaching this conclusion, you are ignoring one of the most fundamental concepts of finance, the other side of the coin called risk. Risk is like energy, which can be neither created nor destroyed. It can just be transferred from one party to another. In this case, the bank is setting up a low interest rate illusion to transfer its risk to you. Hold on to your wallet right now and understand that what you are buying is in financial terms called interest rate futures. In the long run, interest rates are bound to rise, and this future will not be very bright. So it is just the cover that is expensive and is meant to be so. The bank doesn’t want to assume the risk. A fixed rate mortgage Canada will certainly work out cheaper and safer for you.

  • What if? What if the interest rates do fall. First, as I have mentioned earlier, the ceiling is far away, and there is enough room to go up, but we are almost at the bottom level. Any movement downward will be small and not for a long time. But if it does go down considerably, you still have the option to refinance it. So you will never really be short of options. But be careful to consider the costs that you may incur while refinancing. Probably, the odds are heavily inclined toward interest rates moving up. In case, you do not have enough knowledge of interest rates, it will be a safe option to opt for a fixed rate mortgage Canada.

Question number 2: What are the various types of fixed rate mortgage Canada?

Once you have decided to opt for a fixed rate mortgage Canada, it is essential that you choose the right type. This will depend on your personal situation and preferences. Broadly, there are three types available. A short note on each it is as follows:

  • Closed fixed rate mortgage Canada: A closed mortgage is one in which you are not allowed to make prepayments. It means even if you have cash, you cannot go ahead and pay. The banker has spent a considerable time and money while giving a loan to you, and he thinks the bank deserves the interest for the entire period. If you pay the bank earlier than expected, they lose interest income and have to look for somebody else. These mortgages will have cheaper rates.
  • Convertible fixed rate mortgage Canada: A convertible fixed rate mortgage still does not allow you to prepay. It guarantees the interest to the bank if you do not turn a defaulter. But it gives you some flexibility. If you face an unexpected situation of job loss or financial turmoil, you can extend your term. This will bring your monthly payments down.
  • Open fixed rate mortgage Canada: In case of an open fixed rate mortgage, you will have the flexibility to prepay whenever you feel fit. Of course, there will be charges relating to it. But nonetheless you have an option. This brings about a lot of uncertainty to the bank with regard to its interest income. So this type might be the most expensive of fixed rate mortgages.

There are many more facts you should know about your product. It is advisable to contact a qualified intermediary who you trust for reaching a better decision regarding your mortgage. This will make your investment as safe as a house.

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