Monthly Archives: October 2011

If you have a variable rate mortgage, you’re not alone. A new Bank of America/Merrill Lynch report reveals that 66% of Canadians now have mortgages that are floating with prime – up from the typical 30%

There’s absolutely nothing wrong with having a variable rate mortgage, but the Merrill Lynch report reiterates that these mortgages would be affected by an increase in the Bank of Canada’s overnight lending rate – something not all mortgage holders are prepared for.

While the Federal government changed the mortgage rules so that anyone applying for a variable rate must now be qualified on the five-year fixed, let’s be realistic – not everyone ends up paying that higher rate. To free up monthly cash flow, most mortgage holders prefer the lowest rate possible so they can afford additional expenses more comfortably. Judging by the Bank of Canada’s most recent announcement, it doesn’t look like it’s going to be raising interest rates anytime soon – but that doesn’t mean you shouldn’t get your finances in order now.

At one point, your household was approved on the going five-year fixed rate – so it might be a wise move to take a look at your budget, trim frivolous spending and increase your mortgage payment. That move will lessen the blow when rates eventually rise. Because they will rise – and when they do, they may increase quicker than you currently expect. As little as a 2% increase in the lending rate will erase any savings variable rate holders are currently experiencing. If the Bank of Canada increases its lending rate by increments of 0.5%, you’ll only have four months to adjust.

When it comes time to choosing a mortgage, many homeowners opt for the lowest rate they can find, at the traditional five-year term, without paying attention to the fine print. In many cases, these no-frills mortgages – and even some that have frills -can make a huge dent in your wallet if you ever try to break them.

The concept of Interest Rate Differential (IRD) is one that often comes up in these situations – and is currently in the news thanks to a single mom’s lawsuit against CIBC. The woman, who recently went through a divorce and was forced to break her mortgage, is suing CIBC for using vague language in her mortgage contract that is forcing her to pay the IRD – the amount of money the financial institution will lose in interest payments as a result of the broken contract. In this situation, it’s around $45,000 because she had eight years left on her mortgage.

The formula that banks use to calculate the IRD are among life’s great mysteries, and often differ between bank to bank, and whether you have a fixed or variable rate mortgage. If you’re signing a mortgage, it’s best to find out what your bank’s policy is upfront, just in case you may have to break it at some point. You may also want to pay a few extra points to ensure your mortgage is portable (can be moved to another home, if you choose to move during the term of the mortgage) or, if you’re not quite sure what the future might bring, sign on for a shorter term. There’s no rule that says you have to sign on for five years – and, in many cases, a lesser term makes more sense, and might even save you money.