What Are Adjustable Mortgages and How Do They Work?
Adjustable-rate mortgages, also called ARMs, are loan payment plans with a floating interest rate and monthly payment. Interest rates increase and decline periodically according to an index that tracks the economic climate.
Unlike a variable mortgage, where the interest rate changes but payments stay the same, in an adjustable mortgage, your monthly payment is recalculated along with your rate. This means you will have to contribute varying amounts year by year, but the loan is amortizing and is guaranteed to be paid off by the end of the term.
How Frequently Do Rates Change in an ARM?
The frequency of change depends on the structure of the ARM you choose. Typically, ARM rates fluctuate on a yearly basis. There are several ARM structures in the Canadian market, and our mortgage advisors offer many of them with attractive terms and favourable conditions.
The primary difference between ARM structures revolves around the initial, fixed-interest period. Often, lenders incentivize adjustable mortgages by offering an initial rate that is significantly below market averages. This rate is locked in for the first 3, 5, 7, or sometimes 10 years. Your interest rate begins to change only after this period ends.
How Do Indexes Determine Interest Rates?
The Bank of Canada is ultimately what drives change in ARM interest rates. They publish the prime lending rate that banks use as a benchmark to calculate their loan rates.
Rate caps also play a role in the fluctuation of your interest rates. Caps are incorporated into your mortgage contract, and they limit the amount your rate can rise and fall periodically, as well as over the lifetime of your loan. Rate caps are an essential component in every ARM, as they can mitigate your losses in the event of a climbing market. They are often seen as a homebuyer’s safety net.
When calculating potential payment scenarios, it’s important to consider all the different factors involved, including your index and rate caps. Our mortgage advisors are proficient at comparing and contrasting all terms and conditions. We can walk you through the possible outcomes of your ARM so you can plan accordingly.
What Advantages Do Adjustable Mortgage Rates Offer?
If you’re able to tolerate the risk of rising payments, you could reap the rewards of falling interest rates. The biggest advantage of adjustable rates is that they can decrease, thus reducing your monthly payment with it. If this happens drastically or consistently, you can cut your overall interest payments substantially over the lifespan of your loan.
Find the Lowest Mortgage Rates in Canada
Homebuyers come to The TMC Group to explore the best adjustable mortgages on the market. Our mortgage brokers are renowned for our in-depth counsel. We’ll take you through every possible scenario step-by-step so that you can choose the best ARM with confidence. Call (888) 418-6979 now to get started.