All about VIRM’S (Variable Interest Rate Mortgages)

It seems like the VIRM is the more common mortgage option now adays, especially given the fact that the spread between the discounted 5 year variable closed and 5 year fixed is currently over 2%. Just to put it into perspective, the difference in monthly payments between the two on $100,000 is approximately $113 based on a 35 year amortization. But whether the variable mortgage may be the right option for you shouldn’t be solely dependant on rate. As you know, the interest rate on a variable mortgage fluctuates and more importantly is currently on its way up but not knowing how the product works may leave you with more challenges down the road. Aside from using IDEAS outlined in my blog Fixed or Variable to help you evaluate your situation, I thought I would go over everything you need to know about Variable Interest Rate Mortgages. Keep in mind that the products in my blog are specific to TD so always check with your lender on their mortgage products work.

There are two types of variable mortgages. Open and closed. Both with TD are 5 year terms but the 2 main differences are the rates and prepayment privileges. With the variable closed, the rate is usually priced below bank prime and with the open it’s usually priced above bank prime. In terms of pre-payment priviledges, the closed term does not allow the mortgage to be pre-paid in full without paying 3 months interest compensation. The open term allows pre-payment in full however administration fees apply if the mortgage is paid in full in the first or second year, $500 and $250 respectively. Two important things to note about variable mortgages with TD is that they are NOT assumable nor portable. To learn more about portability, please visit my article on Porting or Replacing your Mortgage.

The interest rate on a variable mortgage is calculated monthly, not in advance and changes when TD Mortgage Prime changes. This is different than a fixed rate mortgage in which the interest is calculated semi-anually and not in advance. The rate is set on the 1st day of each month based on the variable mortgage rate. So if the bank prime changes mid month, your variable rate will not be changed until the first of the following month. Keep in mind your lender’s rate adjustment policy if you choose to go with a variable mortgage. Your payments on our variable mortgage are fixed for the entire 5 year term. I always recommend to those who choose a variable mortgage to set their payments based on a higher rate to pay off the principal faster and to safeguard against interest rate increases. Since interest rate fluctuations can push the outstanding balance beyond the contractual amortization, it is always a good idea to increase the payment frequency and amount. For more information on how to pay off your mortgage faster, please visit my blog on Mortgage Payment Plans and Say Goodbye to your Mortgage Faster. When your interest rate reaches the point where your payments no longer cover the interest charged under the mortgage, this is referred to as the Trigger Rate. If this occurs, you may be asked to pay your mortgage down to the appropriate trigger point, re-evaluate your property, convert your mortgage to a fixed rate, or increase your regular payments.

If you currently have or choose to go with our closed variable mortgage, you have the option to early renew into a fixed rate mortgage with a minimum term equal to the lesser of 3 years or remaining period of the original term. If you have or choose to go with our open variable mortgage, you have the option of renewing into any fixed term mortgage. So as you can see, there is more to variable mortgages than just the rate. Knowing what your options are during your contract period can have an impact on your decision or situation down the road. Going forward, the variable may no longer win according to the Financial Post, but there never seems to be a clear answer on whether to lock in or stay variable. No matter what type of mortgage financing you are looking for, it makes sense to speak to me first. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com