Fixed/Variable 101: What is a variable rate mortgage?

Hi Ryan here with the Mortgage Centre City Wide. Today, we’re starting a new series of videos on the fixed/variable — qualifying for, penalties with, which is better — basically, any question you can think of related to these topics, I’m going to cover so tune in during the upcoming weeks.

Today, though, we’re going to start today with the basics — what is a variable rate mortgage?

With a variable rate mortgage, as you can guess from the name, the interest rate changes throughout the term. Your interest rate is going to be tied to the bank’s prime rate. You’re going to have some kind of discount to prime. Right now, a good discount is prime — 0.8%. So no matter where prime goes throughout the term, you’ll always be 0.8% below that mark. Right now, prime is 3%, so your rate starting out will be 2.2%. Now, if the big banks’ economists are correct & prime increases to 4% by the end of this year, your rate at that time will be 3.2%.

Now, there are open variable rate mortgages & closed variable rate mortgages. With open mortgages, you can pay the mortgage out at anytime, without a penalty. With closed variable, if you want to exceed your prepayment privileges or end your mortgage early, you have to pay the penalty. Generally speaking, unless you’re planning on selling the home in the very short term, as in, a few months, it’s better to go with a closed variable. The reason being, with an open variable, instead or prime minus, you’re looking at prime plus 1%. So instead of 2.2% (closed), you’re looking at 4% (open). Because the interest rate is so much higher & you’re paying so much more interest compared to a closed variable, it’s likely going to be better to pay the penalty & go with a closed.

There are 2 types of closed variable mortgages — fixed payment & fixed amortization. With fixed payment variables, obviously your payment is the same each month but when your interest rate rises, your amortization increases. Conversely, when your rate decreases, your amortization decreases. This is great in a declining rate environment because your amortization will shrink down without you having to pay more money each month. HOWEVER, in a rising interest rate environment, like the one we’re facing today, this is generally not something I’d recommend because your amortization may increase to the point of getting you in trouble.

With fixed amortization variables, when your interest rate changes, so does your payment. If you want a fixed payment, I urge all my clients going with variables to do so but fixed it at a higher level. Watch my “variable rate mortgage strategy video” for more info on this.

That’s our very basic breakdown of the different types of variables out there, watch my next video on what controls your variable rate mortgage.

Ryan Zupan
Mortgage Planner

Is it worth waiting to save 20% down? Pay the insurance premium or wait?

Hi, Ryan Zupan here with the Mortgage Centre City Wide. Last week, we talked about mortgage insurance, what it is & what the premiums are, and this week we’re going to talk about whether it’s worth buying today, paying the premium, or waiting until you have a 20% down payment & avoid the premium all together.

Let’s look at this example. Let’s say you want to buy a $400K condo &, right now, you have 5% saved for a down payment – $20K. The CMHC premium in this case is $10,450. To avoid paying that, you will need $60K MORE than you have right now. I’m going to need $80,000 for a 20% down payment. Ask yourself, how long will it take you to save that $60K? 4 years? 5 years? Maybe longer? How much higher do you expect property values to have increased by that time? More than that $10K? Is it worth waiting?

Let’s say you are able to save $12K / year & it would take you 5 years to save the 20% down payment. If you went ahead & bought today with 5% down, paid that premium, then just applied that $12K per year as a lump-sum on your mortgage, not only will you pay off that premium in a year’s time, but, compared to buying with 20% down, after your 5 year term, you will have a lower outstanding balance, a lower payment & be 5 years closer to paying off your 25 year mortgage than you would waiting. All this AND you get to buy a home today, for today’s prices, with interest rates still much lower than they’ll likely be in 5 years & avoid paying rent for the next 5 years.

If you’d like more information on the insurance premiums, or you’d like me to calculate how much the premiums are going to cost you – is it worth you buying today or is it worth waiting – contact me, I’m Ryan at City Wide Financial.

Ryan Zupan
Mortgage Planner

Mortgage Basics: What is CMHC mortgage insurance?

Hi, Ryan Zupan here with The Mortgage Centre – City Wide.  Today, we’re continuing our talks on the very basics of a mortgage & go over mortgage insurance.  What is mortgage insurance?

Here in Canada, if you purchase a home with less than 20% down, you will need to purchase mortgage insurance.  Commonly referred to as CMHC, but is also offered by Genworth & Canada Guaranty.  Your mortgage insurance premiums are the same no matter where you go, so you don’t have to worry about shopping around.  And that amount is just added to the mortgage amount & paid off over time.

Now the guidelines between the insurers aren’t actually the same.  So this is where a broker can be very useful because we can match you up with a lender that works with the insurer, who best fits your situation.  Not all lenders work with all the insurers.

So what kind of premiums are we talking about?  If you purchase a home with the minimum down payment – 5% – the premium is 2.75% of the mortgage amount, not the purchase price.  The premium does go down for every 5% you put down:

5% down – 2.75%
10% down – 2.00%
15% down – 1.75%
20% down – n/a

Now, if you choose an amortization longer than 25 years, let’s say 30 years, that premium is 0.20% more.

In my opinion, mortgage insurance is a good thing, because without it, first time buyers would have a much harder time getting into the real estate market.

Without mortgage insurance, banks would not want to finance purchases with, say, 5% down because it’s a riskier investment.  Banks do not like foreclosures because they typically lose money going through all the legal proceedings, the lost mortgage income & trying to sell the place.  That 5% of your equity will get swallowed up extremely quickly if you decide to run off to Tahiti after closing.

More options are good options.

I’m Ryan with the Mortgage Centre – tune into my next video where we’ll go over why it’s better to pay the premium & buy, rather than waiting to save 20% down.

Ryan Zupan

Mortgage Basics 101: What is amortization?


Ryan Zupan here with City Wide Financial. This is the first of a series of segments I’m going to do on the basic elements of your mortgage. We’re going to first talk about amortization. The amortization is like the lifespan of your mortgage. Making regular payments, this is how long it will take you to repay the loan. The longer your amortization, the less your payments will be. All things being equal, the shorter the amortization, the higher your payments will be.

So why would anyone want a shorter amortization? The longer you draw out your mortgage, the longer your amortization, the more interest you will pay over time. So you want to find a middle ground, where you have a mortgage payment you feel comfortable making, but also one that isn’t going to have your mortgage follow you around until retirement.

Right now, in Canada, the longest amortization you can choose with less than 20% down, is 30 years. There are a few institutions that will accept 35 year or longer amortizations with 20% down, but those are really exceptions & you don’t want your mortgage to follow you around that long.

If you choose, say, a 30 year amortization, all is not list. If you go with accelerated payments, say accelerated bi-weekly payments, you’re going to bring that amortization down to pretty close to 25 years. You’re going to lose 5 years right out of the gate.

Even, when you first buy, if you’re worried that you don’t want your mortgage to follow you around until retirement, there are lot of strategies & ways that we can cut that time down & save you money.

For more information on the different elements of a mortgage, check out my later videos or contact me:

Ryan Zupan
Mortgage Planner

Mortgage Basics 101: What is a down payment?

Hi, Ryan Zupan here with City Wide Financial.  Today, we’re going to continue our series of talks on the basics of a mortgage & talk about down payment.  Let’s say I want to buy a $500K condo here in Vancouver.  Well, most of us don’t have $500K sitting under our mattress, ready to buy a home with, so I’m going to have to buy some money – I’m going to need a mortgage.  But, I’ve managed to save a few thousand here & there & have $25K ready to put into the purchase of my home.

That $25K of my money is my down payment.  Down payment is the amount of equity you’re putting into your home.  So you have your down payment (equity) & your mortgage (debt).  Down payment + mortgage = purchase price.  The minimum down payment here in Canada is 5%.  There are programs available where you can borrow that 5%.

For down payments between 5-20%, you need to purchase mortgage insurance.  I will discuss this in my next video, but you’ve probably heard the word CMHC used a lot lately, that’s mortgage insurance.  So, for down payments between 5-20%, you need to purchase insurance, so it will be a little more expensive for you.

The last thing I’ll talk about is, sometimes people are faced with the dilemma – should I save for a home or for retirement.  If I max out my RRSP each year, that doesn’t leave much extra to save for a down payment.  The government has a program available for first time buyers, where you are allowed to use up to $25K from your RRSPs to buy a home.  There are some restrictions & you do have to pay the amount back, but you can look at my website for more info:

If you’d like to know how much you can afford, or to lock in a rate, contact me, Ryan at City Wide Financial.

Ryan Zupan
Mortgage Planner