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Choosing Between a Fixed and a Variable Rate

Whether you are obtaining, renewing, or refinancing a mortgage, the biggest decision you face is choosing between a fixed and a variable rate. Making this decision is not a simple task; thus the reason to why so many people are seeking for advice to assist them in selecting the best mortgage interest type for them basing on their individual circumstances. One may either choose to go with an entire fixed 5 year term or a variable term of 3 or 5 years. To be able to benefit from both worlds, you may choose to go with a mortgage which combines both types of interest. What matters is how you tolerate this risk, your current goals, and the stage of life you are in. Below is some information about each of the options to aid you in making the right decision.

The Fixed Rate

Mortgages that have a fixed rate of interest are chosen due to the high level of stability they offer. A mortgage with a fixed rate of interest provides the security of locking in your rate of interest for your mortgage’s term. This implies that you will be able to know the exact amount of interest and principal that you’ll be paying on every regular payment throughout the selected term. The major advantage of opting for a mortgage with a fixed rate of interest is that you can depend on a rate of interest which stays the same during the mortgage’s term. The negative aspect is that you cannot take advantage of a lower rate of interest; that is, the ability to make more of the payments going towards the principle and less to the interest, that is in case interest rates fall during the mortgage’s term.

The Variable Rate

Many people in Canada avoid this option of variable rate mortgage due to the potential risk of increases in the interest rate. However, even though there’s always a risk of fluctuations in the Bank of Canada’s prime rate, this anxiety may not be as serious of a factor as you would assume. There are numerous reasons for considering a mortgage with a variable rate.

Many economic experts in Canada believe that a mortgage rate, which varies with fluctuations in the prime rate of the bank will present the biggest advantage when it gets to long term savings in interest-costs. When Dr. Moshe Milevsky, an Associate professor of finance at York University examined the mortgage rate data for Canada, he discovered the following:

  • Many Canadians would have saved $20,000 on interest payments over a period of 15 years (on a mortgage of $100,000).
  • Several people in Canada would have benefited more from a variable rate mortgage then they would from a 5-year fixed 89 percent of the time.

What is involved in a mortgage with a variable rate

  • Regular payments for the mortgage are set for the term, even though the rates of interest may alter during the time.
  • When the rates drop, a higher amount of the payment goes to the principal. When more goes into your principle, you pay less interest and the mortgage is also paid off fast.
  • When the rates rise, there will be an increase in the payment portion that goes to the interest. When less is paid on the principal, the amortization period is also lengthened.
  • The variable rates consist of the lowest rates more often than not.
  • You are offered freedom by the variable rates to convert any particular time to a mortgage with a fixed rate with a term which is at least as long as that which is remaining on the mortgage.

Choosing to put both variable and fixed rates in one mortgage term
If you are not sure whether you should place all your eggs in one basket, you don’t have to worry about that. In case you have got enough equity in your home, there is a plan offered by some banks which might suit you best. It provides you with the flexibility to select both the variable and fixed rate mortgage in a single plan. Your mortgage can be split between variable and fixed rates with different maturities and terms so as to benefit from the potential interest savings and the predictable rate’s security.

Whether the rates fluctuate or remain stable, this strategy lessens the risk of making a decision which is bad and might help you save thousands of dollars in interest-costs over your mortgage’s life.

Fixed rate versus variable rate versus both: What should be taken?

Mobile mortgage specialists can offer you advice on the current rates that are offered by the different Canadian banks and assist you in choosing the best option for your situation and risk-tolerance. Below are some guidelines to help you get started on thinking about which is the best and right option for you.

The fixed rate mortgage is your best option if:

  • You take pleasure in the rate’s security which is guaranteed to remain constant for the mortgage’s term and are prepared to pay a little higher rate of interest for the security.
  • You like better the composure of predictable mortgage payments as well as amortization which are guaranteed to not change during your mortgage’s term.

The variable rate mortgage is your best option if:

  • You’re contented with the fluctuations in the rate to achieve probable long tern savings in interest.
  • You’ve got the flexibility to agree to the possible increases in the amortization in case the interest rate increases.
  • Regular payments on the mortgage are laid down for the term, even if the interest rates have chances of fluctuating during that period.

A combination of both of the rates is your best option if:

  • You have concerns about the future rates of interest and want to benefit from the fixed rate’s security, whilst wanting the probable long-term savings for a mortgage with a variable rate.
  • You have got adequate equity in your house that the default insurance isn’t needed.
  • You need to enjoy the best of both of the worlds.

Choosing the mortgage with a rate which works best for you

The truth of the matter is that there isn’t anyone that can be sure about what is held by the future. Instead of trying to guess where the rates are headed, it is best to consider your personal situation. You should consider your present goals, the life-stage you’re in, your objectives and the risk of tolerance.

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How to Improve Your Credit Score and Make Yourself Eligible for Canada’s Best Mortgage Rates

CRA forgiveness

There are numerous ways of improving your credit rating in Canada for the purpose of obtaining a better mortgage rate. Your established credit history is essential for achieving the best Vancouver mortgage rates for your next mortgage. A lower credit score can reduce your maximum qualification, or even make you ineligible for a mortgage. A good credit history will always help you be approved for the best rates in Canada. Here’s how to ensure you are eligible:

HOW TO IMPROVE YOUR CREDIT SCORE:

  1. Ensure bills are paid on time. All missed payments are documented on your credit bureau and affect your credit score considerably. If bills are left unpaid, they may be sent to Collections, which drops your credit score even further. Always make your minimum payment on time.
  2. Have at least two (2) credit products in your name. Absence of a credit score occurs when you either a) have very poor credit history, or b) have less than two credit products reporting to your bureau. Acceptable credit products include cell phone bills, credit cards, auto leases, or credit lines.
  3. Avoid having credit card/line balances above 75% of the maximum limit. High balances will reduce your credit score, even though you are making your payments on time.
  4. Pay off high interest debts first. Debts can reduce your maximum qualification for debt serving on a mortgage application. Try to pay down the high interest products as fast as possible prior to obtaining a mortgage. Fewer monthly liabilities will maximize your mortgage qualification.
  5. Use a Vancouver Mortgage Broker. Avoid disclosing your credit history to more than one lender while you search for your new mortgage. Numerous inquires on your credit bureau can affect your credit score substantially. Use one professional that can direct your credit report to one lender at a time without having to re-pull your bureau.

The points mentioned above should be reviewed and followed accurately between the time of your pre-approval qualification to the time of your mortgage funding. Familiarizing yourself with #2 and #3 will ensure you establish a credit score. Apply all the other points to ensure the credit score is substantially high.

Note that your credit score can deteriorate within a monthly span, and lenders will consider dropping a mortgage approval on the day prior to funding if the credit score of any of the applicants has decreased substantially prior to funding.

The Impact Your Credit Products Have on Your Mortgage

The relationship between your credit card and your credit score is the most crucial one of all credit trades. Credit cards, auto loans, and recently added Credit Lines are your highest interest debts and the strongest determining factor of your credit score. Regardless of the balance amount, any balance close to the product limit will effect you considerably.

Lenders cannot review the frequency of your payments or any other payment amounts prior to the latest while reviewing your credit report. Regardless of the history behind each individual trade, all that is stated in your credit report is the credit product limit, it’s current balance, and documentation of your late payments on all of your credit products. A sub-average credit score determined by high balances or maxed out credit card means that you are considered a financial risk by the mortgage lender almost as much as someone with late payments.

Maintaining a $0 balance, or paying off credit cards on a monthly basis is a very difficult task, but keeping your credit cards under $1,000 is a substantial benefit. Attempt to pay off your credit cards as much as possible prior to qualifying for a mortgage in order to maximize your purchase power.

Recently, the Bank of Canada passed a regulation for all mortgage lending institutions to calculate payments of unsecured Credit Lines using the same method as for credit cards. This means interest only Credit Line payments being used to debt service for a mortgage are no longer recognized, and now must also include principle repayment (totaling 3%). We can expect all conforming lenders to have this policy implemented by December 2013.

The Cons of Credit Repair Companies

Another suggestion is to avoid using credit repair companies, that either offer these services for free, but especially when a fee is required. There is no shortcut to repairing your score without the points mentioned above, hence the same procedure must be followed. We advise that you check your credit history online or through a mortgage broker prior to putting an offer on a property.

When you have poor credit history, the Vancouver Mortgage rates you are eligible for can turn out to be higher than best rates, lowering your affordability for the property in mind.
Rather than determining the denial or approval of a mortgage, the credit score also determines the interest rates to be charged. It is very true that credit card balances can damage your credit score, so a person’s credit score is very important especially during a mortgage loan request.

Should you have any questions, feel free to contact us at any time!

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