Getting A Loan With Your Partner Understanding Mortagages And Rates

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By Mia Bolaris-Forget

So, you’re interested in taking out a loan. Congratulations! But remember, making a well-calculated decision depends on knowing and understanding the various rates and how to calculate each.

Standard Variable: Though the most widely used by borrowers, the standard rate is, as implied variable. It fluctuates according to some pre-determined base index (ie: treasury notes). If you have a fixed rate or other low rate loan, chances are you’ll be switched over to a standard variable once your introductory rate comes to an end.

Benefits:
· Simplicity
· Benefits due to falling interest rates benefit from interest rate falls.
· Generally penalty-free should you decide to switch

Limitations:
· Other lower rates may be available.
· Inability to forecast the market may challenge your ability to plan ahead.
· Increased interest rates, generally mean increased payments

Fixed Rate: With this type of mortgage you are “locked in” to paying a fixed rate for a designated amount of time, usually between one and five years.

Benefits:
· Knowing exactly how much is due and when.
· Remaining “unaffected” by rising rates

Limitations:
· Deriving no benefit from falling rates.
· Penalty associated with switching policy terms and conditions
· A risk of increased rates once you’ve satisfied the fixed rate portion of your loan.

Tracker Rate: Keeps track of “the market”. Your payment varies with the fluctuation in bank rates. Additionally, your fee generally reflects a set percentage above the base rate (about ½ percent) for either a specific amount of time or for the full term of the loan.

Benefits:
· Direct savings from falling interest rates. The only exception: if your tracker mortgage had a predetermined minimum interest rate that the base rate fell below.
· A set amount that your payment could not exceed.

Limitations:
· A substantial and direct increase in dues related to increased interest rates.
· Potential penalty associated with policy changes.
· Cheaper rates offered by other types of mortgages

Discounted Rate: A lower than average interest rate. Generally, this rate offers a small percentage off the lender’s standard variable rate for a given amount of time. A change in the standard variable rate changes also means a change in the discounted rate.

Benefits:
· Lower (than average) interest rates
· Direct (financial) benefit from falling interest rates.

Limitations:
· Substantial increase in monthly payments after the end of the discount period.
· Penalties associated with policy adjustments.
· Short lived discounts
· If interest rates rise, so does the discounted payment.

Capped: Prevents rates from rising past a certain level, usually for one or two years.

Benefits:
· Benefits despite rising or falling rates
· Peace of mind in knowing that your payments will not exceed a pre-budgeted amount.

Limitations:
· Initial rates that are higher than the cheapest fixed and discounted rates.
· Penalty for switching to another mortgage before the capped rate ends, and sometimes for a set period after
· A significant increase in payment once your cap period ends.
· Short term cap term