Are you in the market for a new home this spring? If so, it's a great time to purchase a property due to the low interest rates. If you're like most borrowers, however, you don't pay a lot of attention to the mortgage rates posted since you know that this may not be the exact amount you'll be paying. These posted rates do matter though and it's important that you understand why.
If you are looking for a mortgage with a variable rate, you may still have to meet the standards for the posted higher fixed-rate to qualify. This is due to the fact that the Canadian government considers these variable rate mortgages as more of a risk factor and is trying to keep their growth limited.
If you're looking for a fixed-rate mortgage you may qualify for the loan based on the actual interest rate that you'll have to pay. This is usually lower than what the posted rate is. In other words, you may end up qualifying for a higher mortgage if you apply for a fixed-rate instead of a mortgage with a variable rate.
If you have to end your mortgage early and the interest rates are going down, the payment penalty will be based on an interest rate differential. In order to come up with the final penalty amount, the bank will often use the posted rate as it was when the mortgage was first initiated and the posted rate when the mortgage was canceled.
On the other hand, if you end up breaking your mortgage when the interest rates are going up, you'll have to pay a penalty that roughly equates to 3 months of interest payments. This means that when you decide to end a mortgage to take advantage of lowering interest rates, you'll end up paying a higher penalty.
Even if you are not paying the posted rate of interest on your mortgage, this rate can play an important role if you decide to break your mortgage contract early. The penalty that you'll have to pay may be based on the posted rate instead of on the actual interest rate that you are paying and this could cost a lot more money.