Here are a few things abut the RATE that you meed to be aware of when getting a Variable Rate Mortgage (VRM):
Is there an Initial Discount?
Some lenders and brokers will offer an initial discount, or "teaser rate" to get you to call them. You need to know how much of an initial discount you will be given and for how long (example: 1.5% less than prime for the first 3 months). Don't fall for the teaser rate without knowing what the 'true' rate will be over the long term.
What is the rate AFTER the discount?
While the initial discount seems attractive, it may not be in your best interest to go that route. The key is knowing what the discount will be after the teaser rate is no longer in effect. Sometimes when you average it out over the course of the term, it doesn't work out in your favour. For instance "Lender 1" is offering you a VRM. It's a 5 year term with an initial discount of 1.01% off of prime for the first 9 months. The discount after those 9 months is 0.25% below prime. "Lender 2" is offering you a VRM as well. It's a 5 year term with no initial discount or teaser rate. For the whole term the discount will be 0.75% below prime. When you average it out over the full 5 year term, the true discount with "Lender 1" is only 0.36% below prime, while "Lender 2" has maintained 0.75% below prime. In this example, which is based on actual products available today, a person may think that he or she is getting a great deal by getting an introductory rate through "Lender 1", but in actuality they are getting less than half of the discount that they would receive with "Lender 2".
What is the Interest Rate Lock-in?
Although all product features are important, this is probably the most important feature. Many lenders, especially banks, promise that you will receive the best rate possible when you choose to lock in. But whose best rate? Is there a clear policy in place to ensure that you get the best rate? Was it just a verbal agreement between you and your bank manager who might be transferred in six months and therefore cannot honour your agreement? It is imperative that you have the lock in feature's rate policy in writing, something most major banks can't do. Without a clear policy in place, you are guaranteed nothing…and you could end up with a really high rate when you are ready to lock in.
There are some other key questions that you need to ask your lender or broker when obtaining a VRM.
Additional information can be found by clicking here. Thank-you to my friend at Discount Mortgage Canada for this great input.
