Imagine this nightmare scenario …you look at your Mortgage renewal, at the end of your 5 year term, expecting to see a remaining Mortgage balance of $343,000. But that’s not what you see! You see a Mortgage balance of $355,000!!
What happened?
There is an important distinction to be aware of in Canadian Mortgage land. And this isn’t something many people know or talk about.
Let me ask you this question …
Do you know the difference between a Variable Rate Mortgage and a Adjustable Rate Mortgage?
This is sneaky trick some Banks use to increase their profit but causes heart-break for their clients.
Before we get into the weeds of why this is, let’s cover some basic fundamentals:
- Canada’s central Bankers adjust Canada’s “key lending rate” or “key overnight rate” or “overnight lending rate” etc based on macro-economic happenings (I write about these happenings within my website).
- When Canada’s central rate increases, this trickles down into Canada’s retails Banking “prime lending rate” or “prime rate” or just “prime”. This prime rate affects personal lines of credit, student loans and variable/adjustable Mortgages!
- Each variable/adjustable Mortgage has a relationship to prime that is fixed for the duration of the Mortgage term. This relationship to prime does not change until the conclusion of the term, referred to a Mortgage renewal.
Ok, basics covered.
With an Adjustable Rate Mortgage, when the prime rate increases, there is a corresponding increase to my Mortgage payment. Cut and dry.
With a Variable Rate Mortgage, when the prime rate increases, this is NO corresponding increase to my Mortgage payment. What? My Mortgage payment stays the same BUT the amount going to interest increases.
This is what could create the nightmare scenario of coming to the end of your Mortgage term and barley having paid down any principal balance of your Mortgage but-you-paid-the-same amount.
When taking any adjustable Mortgage, make sure you’re clear on the distinction between a variable and adjustable rate Mortgage.
That is all.
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For any Mortgage question you might have, connect with me directly (details in footer image).
Talk soon,
Chad Moore
