When considering a mortgage borrowers have multiple options including the term, differing interest rates, and payment frequency.  These options should be considered carefully, and a mortgage selected based on the priorities and preferences of the borrower.  Particularly in an environment with quickly changing interest rates, there are various matters to consider in the decision of whether to proceed with a variable rate mortgage or a fixed rate mortgage.  A fixed rate mortgage involves an interest rate which is generally set at the beginning of the term for the full term of the mortgage (most often 5 years but the term can be shorter or longer).  A variable rate, or adjustable rate, mortgage will have an interest rate that will fluctuate with the prime rate as determined by that particular lending institution (for example, Prime Rate plus 0.50%).  Borrowers should consider the implications of both mortgage type and select a mortgage product that works best for their circumstances with guidance from their banker, mortgage specialist or mortgage broker.

With these different types of mortgages there are often also differences on the prepayment costs if a borrower wants to pay out their mortgage prior to the end of the term (either in whole or in part).  The prepayment charge will range to no prepayment charges in open mortgage, to more costly penalties in closed mortgages.  The penalties of prepayment are often based on a comparison to the current mortgage interest rate at the time of payout.  Open mortgage often carry slightly higher interest rates compared to a similar closed mortgage as a trade-off for the flexibility of being able make prepayments with no penalty.

As we are seeing in the current financial environment, and as may be expected over the next few years with potential interest Bank of Canada interest rate increases, variable rate borrowers would notice that their payment allocation would change if the prime rate is increasing with more of the payment going to the payment of interest on a monthly basis versus payment of principal.  As well, with different mortgage products, there would be terms associated with adjustments to the mortgage terms in the event that interest rates increase.  Some mortgages may provide for changes to the payments to be made, requirements for additional payments or possible options for changing a mortgage to a fixed rate mortgage if rates should increase.   Other products may provide for payments to remain fixed unless rates increase to a certain amount in which case there may be additional financial requirements on the borrower to ensure sufficient payments are made to cover the interest costs associated with the mortgage on a monthly basis.

Borrowers should review their specific mortgage options and ensure they are comfortable with those terms as may be applicable to their mortgage.  We strongly recommend working through the options with your broker, banker, or mortgage specialist when making the decisions on what mortgage to select.

Author: Una Kuzio

This information is general in nature only. You should consult a lawyer or appropriately qualified party before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or our lawyers practicing in the area of real estate at the following:

• Una Kuzio: una@touchstone.law