Everybody has heard of Variable/Adjustable Rate Mortgages (VRMs / ARMs)-but very few people understand what they are, how they work and so people tend to shy away from one of the best products available to help them pay down their mortgage faster. As one of the most innovative mortgage products available, the adjustable-rate mortgage (A.R.M.) is increasing in popularity among Canadians. The ARM caters to individuals who have a higher risk threshold and believe that the bank rate will either remain stable in the near to mid future.
The greatest difference between ARMs and fixed-rate mortgages is how the rates are set. ARM rates are set based on the Bank of Canada rate. The chartered banks add a premium to the Bank Rate to establish the Prime Rate. This is what most lenders use to price their various adjustable products.
In our system, the Bank of Canada uses the bank rate to control inflation and certain economic stimuli. When little or no inflation is present, as is the case currently, this rate is set at very low levels and is relatively stable. The fixed rates, on the other hand, are set based on the yield in the bond market. The bond yields are very volatile and tend to fluctuate, often due to political and economic conditions. This volatility makes it far more difficult to gauge what fixed rates will do, even in the short term.
Currently, there are more than 15 different and distinct variable/adjustable-rate mortgage products in the market place. All of this choice generally leads to confusion among most prospective clients; quite often it becomes difficult to distinguish between products.
The most important thing to consider is to ask yourself what you want in the future. Ask yourself, “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 adjustable-rate mortgage is that at any time a client may choose to lock in their mortgage to a fixed-rate/term, at the current rate. Some banks will not fully discount the interest rate at lock-in time, so understand your options prior to signing the mortgage commitment. In many respects, this mortgage appears complicated. With our assistance you can navigate your way through the maze and ensure that you receive the BEST product available to suit your needs. After all, a ARM is still one of the best products available to help you pay your mortgage off faster. It’s worth the effort to find out more.