What is an Adjustable Rate Mortgage?

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April 18, 2023

When acquiring a mortgage, you will have the option to choose between variable, adjustable, and fixed mortgage rates. Each has its ups and downs so, before making a decision that will set a course for your finances for several years, you first need to understand what an adjustable-rate mortgage is. Since it is crucial to understand all the options before choosing a mortgage, the experts from PHL Capital can provide you with guidance on the best option.

Types of Mortgage Rates in Canada

When applying for a mortgage, a lender will offer several different types of mortgage rates. Mortgage rates are interest rates you will be paying over the duration of the mortgage, and these rates can be floating and non-floating. The most common types of mortgage rates are:

  • Fixed Mortgage Rates—With this type of mortgage rate, the interest rate will be the same the whole duration of the mortgage. This means the monthly payment will remain the same.
  • Variable Mortgage Rates—Having a floating mortgage rate means that if prime rates increase, so will your mortgage rates; however, this increase will not affect the monthly payment, which will remain the same, but the amount that goes toward paying off the principal will decrease.
  • Adjustable Mortgage Rates—Floating rates where if prime rates increase, so will the mortgage rate altogether with the monthly payments.

Adjustable Mortgage Rates Explained

With adjustable mortgage rates, the monthly payment and mortgage rates will go up as the prime rates of the bank go up. This can also go in the opposite direction, meaning you can end up paying less if the prime rates go down. Adjustable Mortgage Rates, or ARMs, will be divided into two main periods. The first one is called the introductory period, where your rates will be significantly lower than lenders’ prime rates. This period usually lasts for 3-6 months.

After this comes an actual rate period, which will be applied to your amortization period, which can last from 25 to 40 years.

Are Adjustable Mortgage Rates a Good Option?

Since the amortization period can last a long time, it is important to ask a mortgage lender all the questions you may have before choosing the right mortgage for your needs. For many people, ARMs are way better than fixed-rate mortgages since they give the opportunity to pay off the mortgage faster; however, it is important to ensure that you will be able to withstand any financial increases in payments.

PHL Capital is the leading lender in BC with experience and expertise in real estate crediting and financing. Our team of professionals will be more than happy to sit down with you and provide you with guidance so you can choose the right mortgage.