What Is a Variable Rate Closed Mortgage?
A variable-rate closed mortgage is offered by many Canadian financial institutions. Borrowers often find that mortgage interest payments change over the life of their loan if they don't have a fixed-rate loan. A variable-rate closed mortgage helps consumers manage their interest rate exposure.
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Definition
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A variable-rate closed mortgage loan offers a borrower a variable interest rate to start off with. If the borrower chooses, he can opt to switch over to a fixed rate later. For instance, if he expects interest rates to go up in future, he might later decide to lock in a fixed interest rate rather than paying a variable rate that is likely to mean a higher interest payment.
Advantage
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If a mortgage borrower uses the option to convert her mortgage to a fixed rate, she could save money on interest payments. If she locks in a fixed rate of 4.5 percent on a loan on which she would have paid 5 percent by paying a variable interest rate, she saves money on the additional interest.
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Disadvantage
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Not everybody uses the option to convert to a fixed rate for the most benefit. A borrower who thinks interest rates are headed up and switches over to a fixed interest rate could end up paying more if interest rates actually decrease.
Term of Fixed Rate
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Financial institutions usually expect the term of the fixed-rate loan to be at least three years. At the time the borrower exercises the fixed-rate option, the term of the fixed-rate loan is three years or the remaining length of the mortgage.
Prepayment Available
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Canadian lenders who offer the variable rate closed mortgage typically also allow borrowers to prepay the mortgage before its term ends. Consumers could save money by paying off their mortgages early.
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