Mortgage Interest Rates

An important aspect of your home mortgage is the interest rate. This rate is negotiated for a period of time - from 6 months to as long as 10 years. This time period is the period over which you will pay the agreed interest rate.

The lower your interest rate, the less you pay in interest costs over the life of the mortgage. This can also save you thousands of dollars, especially on the mortgage you negotiate when you first buy your property.

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When you first buy your property the amount of your mortgage will be the biggest it will ever be. At this point, the majority of your payments will be interest charges and a smaller amount will be used to reduce the 'principal' (which is the amount of money borrowed.) Therefore, the lower your interest rate, the less you are paying on this large sum of money - and the more money you save in the long run.

How do you get the best interest rate? Shop around. Be sure to negotiate. Your business is the lifeblood of a lender - remember that you are going to make them money. While they may want you to think that they are doing you a favor, in reality you are doing them a favor - as long as you are paying off your debt as you should!

A final word on interest rates: mortgage lenders 'stack' the deck in their own favor. Any interest rate they are willing to charge is at a level at which they believe they will make money. This is certainly not a charity business. Now, if you 'lock in' your interest rate for 5 years you will likely pay more for your mortgage. Why? Because they want to ensure that they will make money even if rates go up. So, anything which you do to reduce your risk (like locking in payments), you can expect to pay more for because you raise risk to the lender.

However, if you are willing to accept a bit of risk at your end (particularly if you have a stable job and a good credit history) you are almost always better off with variable rate mortgage. This type of mortgage allows the interest you pay to fluctuate with the market. While this sounds risky, it actually allows you a lot of freedom and almost always saves you money, for two reasons:

  1. The interest rate charged on variable rate mortgages are usually much less than any 'locked in' rate
  2. If the rates look like they will go up you can generally switch to a 'locked in' interest rate at no penalty.

In other words, you can't lose with the variable rate type of mortgage (as long as you can switch without penalty).

Mortgage Guide 101. Used with permission. See