Theodore Lowe, Ap #867-859 Sit Rd, Azusa New York
Theodore Lowe, Ap #867-859 Sit Rd, Azusa New York
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If you are looking for a short-term, variable-rate mortgage, a 6-month mortgage may be the right option. A 6-month mortgage is excellent for someone looking at a quick turnaround with a property, like a real estate investor or expecting to pay off the mortgage within the next six months.
This guide explains how a 6-month variable-rate mortgage differs from other variable-rate mortgage terms and other fixed-rate mortgage terms. Let’s start by understanding what this mortgage term is all about.
6-month variable-rate mortgages are loan products offered for a 6-month term with rates that change with the lender’s prime lending rate changes.
While your regular mortgage payment may not change, your interest rate will change if the lender’s prime rate changes.
Changes in your interest will not necessarily affect your regular mortgage payment. It will impact the payment portion to pay down the mortgage loan.
In a falling-rate environment, more of your payment will go towards paying down the mortgage loan. While in a rising rate environment, a more significant portion of your mortgage payment will go towards the interest expense.
The rates on variable mortgages are tightly tied to the lender’s prime rate, directly linked to the Bank of Canada’s prime rate. Variable rates are quoted as Prime Rate (+/-) A Margin.
Let’s say a lender is quoting its 6-month variable-rate mortgage at Prime – 1.4%, and its current prime rate is 2.45%.
Your mortgage rate will be 1.05%, the lender’s prime rate of 2.45%, minus the margin rate of 1.4%.
If, after a year from today, the lender’s prime rate increases to 2.95%, your mortgage rate will be 1.55%. The new increased prime rate of 2.95%, minus the actual margin rate of 1.4%.
On the other hand, if the lender’s prime rate decreases to 2.15%, your mortgage rate will be 0.75%, the new lower prime rate of 2.15% minus the original rate margin of 1.40%.
In all the above scenarios, your rate margin does not change – only the prime rate changes.
The 6-month term has less exposure to interest rate risk than the other variable-rate mortgage terms.
There is a low probability that the interest rate will change before the end of your 6-month term compared to three-year and five-year variable-rate mortgage terms.
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At the end of the 6-month term, you can either renew or refinance the mortgage.
Refinancing the mortgage entails replacing the mortgage with a new one. Refinancing a mortgage allows you to customize your mortgage more, such as switching the rate type from fixed to variable, switching the terms from 6 months to other variable rate mortgage terms or fixed-rate mortgage terms.
Overall, the terms, interest rate, rate type, conditions, and probably lender, for the new mortgage will differ from those of your existing mortgage.
There are many reasons why you may choose to refinance your mortgage after the end of the 6-month term:
Renewing your mortgage extends your contract to a new term with your default mortgage insurer without changing your loan amount or amortization period. You can restore your mortgage to stay with your current lender or move to a new lender through a switch.
You will likely get a new rate when you renew or switch your mortgage.
Federally regulated lenders, such as TD, Haventree Bank, Scotia Bank, and EQB, are required to provide you with a renewal letter at least two days before the end of your current mortgage term.
The renewal statement will contain the following information:
A 6-month Variable-Rate mortgage will be right for you if you:
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A 6-month variable-rate mortgage is better if you:
A 6-month fixed-rate mortgage will be right for you if: