Overview of an Adjustable Rate Mortgage?
An adjustable rate mortgage (ARM) also known as a variable rate mortgage is a closed mortgage that offers you the ability to take advantage of low, short-term interest rates. The interest rate for an ARM is based on the Prime Lending Rate set by the Bank of Canada. The Bank of Canada meets quarterly to decide if the Prime Lending Rate needs to be increased or decreased depending on the economy. There is a piece of mind in this type of mortgage that is you can convert to a Fixed Rate Mortgage at any time during the term should the Prime Lending Rate Increase. The interest rate of this mortgage is dependent on the prime lending rate set by the Bank of Canada; if the prime lending rate goes up so does your interest rate and payment.
Reasons to Consider an Adjustable Rate Mortgage
The Prime Lending Rate has been historically low for the past 5 or more years which has allowed borrowers the opportunity to pay down their mortgages faster. This type of mortgage is best suited for a person who doesn’t have a fixed income (ie. Self-employed, commission based or contract) or someone who likes to take risk with investments.
Disadvantages of an Adjustable Rate Mortgage
- The disadvantage of an Adjustable Rate Mortgage (ARM) is if the Prime Lending Rate goes up then so does your monthly payment. If you are on a fixed income this could create a problem with your day to day living….and
- Should the Prime Lending Rate increase so will all of the interest rates offered for a Fixed Rate Mortgage and you may end up paying a higher fixed rate than you would have initially when you arranged your mortgage?