Rate Increases and your ARM vs VRM

This article was originally published on the Dominion Lending Centres blog.

Some of you are going to ask what is an ARM and VRM? These two acronyms are mortgage speak for adjustable rate mortgage and variable rate mortgage. These two mortgage products are based both on the prime rate of interest, in most cases this is 2.70% at the bank. TD chose to be higher by .15% at 2.85% so it isn't controlled by the Bank of Canada. It is an individual financial institution policy.

With the Bank of Canada hinting strongly at moving up the interest rate, most likely by .25%, we will see an increase in the prime rate most likely to 2.95%. If you have an adjustable rate mortgage then you will see your monthly payment increase to match this new rate. So an Adjustable Rate Mortgage moves up with prime and you continue to gain ground by making your payments.

Variable rate mortgage is different. The VRM works likes this, your monthly payment will stay the same but you will not be paying less to principal and more to interest. Not a good scenario if you are trying to pay down your mortgage and gain some equity. In this changing market, we suggest that you review the scenario with your lender and make sure that you are keeping up with gaining on your mortgage. The other scenario can also be that if you don't adjust your payment that you could end up paying only interest and not be paying down the principal at all. And remember, a Dominion Lending Centres mortgage specialist can help answer any questions you have.

Author: Len Lane

To view the original article, click here.

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