Fixed Rate Loans Explained
On fixed rate loans, interest rates stay the same for the entirety of the loan’s term. This means that the cost of borrowing money stays constant throughout the life of the loan and won’t change with fluctuations in the market. For an installment loan like a mortgage, car loan or personal loan, a fixed rate allows the borrower to have standardized monthly payments.
One of the most popular fixed rate loans is the 30 year fixed rate mortgage. Many homeowners choose the fixed rate option because it allows them to plan and budget for their payments. This is especially helpful for consumers who have stable but tight finances, as it protects them against the possibility of rising interest rates that could otherwise increase the cost of their loan.
- Fixed rate loans have interest rates that stay the same for the life of the loan
- Consumers who value predictability tend to prefer fixed rate loans
How Many Mortgages Can I Have On My Home
Lenders generally issue a first or primary mortgage before they allow for a second mortgage. This additional mortgage is commonly known as a home equity loan. Most lenders dont provide for a subsequent mortgage backed by the same property. Theres technically no limit to how many junior loans you can have on your home as long as you have the equity, debt-to-income ratio, and credit score to get approved for them.
If Youre Not Keeping The Loan Long Term
Many peoples careers allow them to expect and plan to relocate every so often. For people in this position, an ARM could be a cheaper option than a fixed-rate mortgage. Especially if you know youll have to move in the next 5-10 years.
But even in this circumstance, youll want to run the numbers. With an ARM, youre still responsible for closing costs. Closing costs can be 2%-6% of the loan amount, and for an average home thats thousands of dollars youll pay upfront. If youre only going to be in the home for a year or two it might be cheaper to rent than buy with any type of mortgage.
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What Are The Pros And Cons Of A 30
How can you tell if a 30-year fixed-rate mortgage is right for you? Compare the pros and cons.
- Pros: You have more time to pay back your loan, and your monthly payment is cheapercompared to a 15-year term for the same loan amount. Plus, the fixed interest rate protects you from the possibility of rising rates that could send your monthly payments through the roof.
- Cons: Youre charged a relatively high interest rate over 30 years, which means you pay an unbelievable amount of interest compared to a 15-year term.
Youll Pay More In Interest
Over the course of 30 years, you are likely to pay considerably more in interest on your mortgage than you would on a loan with a shorter term. For example, if you borrowed $160,000 with a 3.37% interest rate, you would pay $94,726.03 in interest over the 30 years. If you borrowed the same amount with the same interest rate for 15 years, you would pay $44,086.16 in interest over 15 years.
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A More Affordable Payment
When you compare the monthly payment on a 30-year fixed-rate mortgage loan to a shorter term mortgage, like a 15-year term mortgage, the payments are often smaller and more affordable. The fixed-rate means your interest rate wont change throughout the life of your loan. But with an adjustable-rate mortgage loan, your rate can change, and could increase your monthly payment.Lets look at this in an example on a $200,000 home loan. For a 30-year fixed-rate mortgage with an interest rate of 4%, your monthly mortgage payment would be around $955. For a 15-year fixed rate mortgage on the same house, with the same interest rate, youd be paying an estimated $1,479 a month. Now lets change up the interest rate options.For the same $200,000 loan, with a 30-year term and adjustable-rate, your initial payment might be $955 a month. If you had a 5/1 ARM, youd pay $955 a month for the first 5 years of your loan. After that, your interest rate would change every year. Lets say the first year it changes, your rate increases to 5%. That makes your new estimated monthly payment $1,057. If the next year it increased to 6%, your payment would be $1,162.
What Happens To My Scotiabank Variable Mortgage When There Are Interest Rate Increases
If you have a variable rate mortgage, when the Scotiabank prime interest rate increases, this means that your mortgage payment may be higher, which could impact your cashflow and budget.
Scotia advisors can clearly outline your options and work with you to decide on the best path forward. Contact your advisor to help choose the right mortgage option for you.
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Is It A Good Time To Buy A Home
Whether its a good time to buy a house depends on who you ask. Many economists, forecasting low, stable interest rates and only modest rises in housing prices, say, unequivocally, yes.
Others, citing tight inventory of affordable housing nationwide, throw up a caution flag.
Still, home sales were at a record high in the spring of 2021, with many people anxious to take advantage of low interest rates and blind to the inflated price they paid.
But buying a house is an intensely personal experience in many ways, the ultimate microeconomic decision.
Whatever else is going on in the residential market space, whether its a good time for you to buy is dependent upon factors such as these:
- You have access to a substantial down payment .
- You are confident about the stability of your household income, not only to meet the payments, but also to take care of upkeep and weather financial surprises.
- Your credit score is in good shape.
- You can be happy for a number of years in the house and neighborhood you can afford.
How Do Interest Rate Hikes Affect Inflation
When interest rates are higher, they encourage people to save. Since it is a good time for people to save, less borrowing and spending tends to happen. When this happens, companies may increase their prices at a slower pace or even lower prices to get people to spend again. This reduces inflation since the costs of goods arent going up in price as quickly as they would otherwise.
Lower interest rates work in the opposite way. Not only does it cost less to borrow money when interest rates are low, but you also earn less from keeping your money in savings, which means you may end up spending more money. This increase in consumer spending could cause prices to rise as consumers are willing to pay more.
The Bank of Canada actively uses interest rate increases and decreases to control inflation. The BoC tries to keep inflation at 2% a year as most of the population can handle that level of year over year change.
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Short Vs Long Term Amortization Periods
Many home buyers choose shorter amortization periods resulting in higher monthly payments if they can afford to do so, knowing that it promotes positive saving behaviour and reduces the total interest payable. For example, let us consider a $300,000 mortgage, and compare a 25-year versus 30-year amortization period.
The mortgage payments under scenario B are smaller each month, but the homeowner will make monthly payments for 5 additional years. The total interest saved by going with a shorter amortization period exceeds $100,000.
For the savvy investor, these savings should be compared to the opportunity cost of other investments. Using the example above, the monthly savings of $142 under scenario B, could be invested elsewhere, and, depending on the rate of return, could come out ahead after 35 years.
Pre-payment privileges set out by your lender will determine whether you can shorten your amortization period, by either increasing your regular monthly payments and/or putting lump sum payments towards the principal, without penalty. However, beyond these privileges, you will often incur costly penalties for making additional payments.
How To Calculate Your Fixed
Four main components are used to calculate your mortgage payment: principal, interest, taxes and insurance. The principal is the amount you borrow from your lender to buy the home.
The interest is the fee you pay your lender for them loaning you the money. Your interest will continue to decrease as you pay off your loan. Youll also pay for homeowners insurance and property taxes. These will be based mainly on the value of your property.
If you want to figure out how much you can expect to pay, be sure to check out this mortgage calculator.
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Pros & Cons Of Fixed Rates
Fixed-rate mortgages offer a number of benefits and advantages from a borrowers perspective. These include, but are not limited to:
- Locking in a fixed rate for the entire loan term means that a borrower is protected from rising rates.
- It can be easier to budget and plan personal finances.
- It provides general peace of mind.
However, fixed-rate mortgages also come with some drawbacks. These include:
- In an environment where rates are dropping, borrowers with a fixed-rate mortgage will miss out on decreasing rates because theyre locked in.
- There are generally early prepayment penalties associated with paying out or refinancing a fixed-rate mortgage before its maturity these can be quite expensive.
- A longer fixed-rate mortgage term can also be harder to qualify for .
Can Anybody Get A Mortgage
Mortgage lenders will need to approve prospective borrowers through an application and underwriting process. Home loans are only provided to those who have sufficient assets and income relative to their debts to practically carry the value of a home over time. A persons credit score is also evaluated when making the decision to extend a mortgage. The interest rate on the mortgage also varies, with riskier borrowers receiving higher interest rates.
Mortgages are offered by a variety of sources. Banks and credit unions often provide home loans. There are also specialized mortgage companies that deal only with home loans. You may also employ an unaffiliated mortgage broker to help you shop around for the best rate among different lenders.
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Definition Of A Closed Mortgage
A closed mortgage is one that cannot be repaid without prepayment penalties during its term, except as permitted in the mortgage agreement. Closed mortgages will typically provide limited prepayment privileges, but will incur a penalty if the borrower pays any more towards the principal than the combined total of the normal monthly payment and these privileges.The prepayment penalty will apply if the borrower exceeds the allowed prepayment privileges when increasing the monthly payments, making a partial principal reduction via lump sum payment or refinancing the mortgage before the end of the term.
What Does Fixed Vs Variable Mean On A Mortgage
Many mortgages carry a fixed interest rate. This means the rate will not change for the entire term of the mortgage even if interest rates rise or fall in the future. A variable or adjustable-rate mortgage has an interest rate that fluctuates over the loans life based on what interest rates are doing.
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Fixed Payments With A Variable
Certain financial institutions will offer fixed monthly payments with a variable-rate mortgage. How does this work? If your interest rate decreases, you’ll pay more principal and less interest, and vice versa if it increases. When rates reach a certain percentage, your financial institution will contact you to adjust your mortgage payments.
Are fixed payments and variable rates the best of both worlds?
Not necessarily. Even if you have fixed payments, rate fluctuations will have an impact when you need to renew your mortgage. You may have to increase your monthly payments to keep the same amortization period. Or you’ll have to refinance your mortgage and extend your amortization to keep your lower payments.
How Long Can You Fix The Interest Rate For
You can currently fix your mortgage rate for one, two, three, five, seven, 10 or 15 years, though one-year and 15-year fixes are rare.
Generally speaking, the longer your fixed-rate period lasts, the higher the interest rate will be.
This is because it is harder for a lender to predict what will happen in the market over a longer period of time – so you’re essentially paying for the security of knowing that your rate won’t go up no matter what happens.
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What Is The Difference Between Overnight And Prime Rate
Prime rate, also called the prime lending rate, is the annual interest rate major banks and financial institutions in Canada use when setting interest rates for mortgages.
Its influenced by the interest rate set by the Bank of Canada , which is also referred to as the BoCs overnight or target rate. The prime rate and the BoC overnight rate are closely related as lenders use the BoC rate to set their prime rate, which generally happens within the few days following the BoC rate change announcement.
What Is A Fixed Rate Mortgage
A fixed-rate mortgage is a home loan that has a constant interest rate for the lifetime of the loan. Fixed-rate mortgages are typically offered in 10-, 15-, 20-, 25-, and 30-year termsgiving homebuyers the security of a predictable monthly payment. Shorter-term fixed-rate loans typically carry the lowest interest rates and are more desirable if you’re comfortable handling a larger monthly payment.
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Changes To The Cibc Prime Rate
Changes to the CIBC Prime Rate are sometimes described in terms of increases or decreases in basis points. A basis point is a unit of measure that represents 1/100th of one percent . For example, if interest rates are increased by 50 basis points, it means they were increased by 0.5%. The term basis point value simply denotes the change in the interest rate in relation to a basis point change.
Open Vs Closed Mortgage: How To Choose
Again, theres no right choice here: it really depends on your financial situation and personal preferences. Generally, most Canadians prefer the simplicity of a basic closed mortgage with fixed interest payments. Its easy to understand and there are no surprises. But if theres a chance that you may inherit a wack of cash in the near future, you may want to opt for an open mortgage so you pay it off faster and incur less interest. Its totally up to you.
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Should I Lock In My Mortgage Rate Now
Its impossible to know what direction mortgage rates will go from day to day. Thats why a mortgage rate lock is such a useful tool because it protects you if rates go up. And with interest rates so low right now, you should lock in your rate as soon as you can.
When you lock in your rate, ask your lender how long the lock will last. A rate lock can be good for anywhere from 30 to 60 days, which typically will give you enough time to close before the lock expires. If you want to extend the rate lock, ask about fees as many lenders charge a fee for extending a rate lock.
Mortgage Term Vs Amortization
One of the most common sources of confusion for prospective home buyers is the difference between a mortgage term and amortization period. Here is a short answer: A mortgage term is the length of your current contract, at the end of which you’ll need to renew The amortization period is the total life of your mortgage. A typical mortgage in Canada has a 5-year term with a 25-year amortization period.
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