Mortgage rates affect two things with your mortgage, how much your payments are and how long is your amortization. If your rate goes up or down, then this will affect either how long it will take you to pay orr your mortgage or cause your rates to increase.

Clearly, when your interest rate is lower, you will be able to pay off your mortgage quicker and pay less in interest. Over the long run, it has been determined that variable rates out perform fixed rates, so why do so many people chose a fixed rate over a variable rate?

The reason is risk. Many people do not want to see their payments increase mid-term, or see their amortization increase too high. This would cause the time to pay off the mortgage in full to increase dramatically. This creates the need for reliable mortgage payments, and removes the risk.

Banks will decide, when profitable, to introduce variable rate products that limit risk. For example, a capped rate mortgage will cap the maximum on which prime rate will increase to. This allows the borrower to have some security on the height rates can increase. The problem with this mortgage is that the borrower will pay a premium over a regular five year variable. The premium can be quite substantial, and usually the cap does not make up for the premium paid by the borrower.

Another product is the split rate mortgage. This mortgage is half fixed rate and half variable. The split mortgage allows borrowers to get some of the advantages of variable, but they would limit their exposure to rising rates by keeping half fixed. The problems with this product, other that the higher rates, is that the terms renew at different times, so if you want to break your mortgage, then you would have to pay to do so. The only time you can get out of your term, without paying a penalty, is when the mortgage is up for renewal.

An open variable also sounds interesting, the ability to pay your mortgage off at any time without a penalty; however, the rates on these mortgage products are much higher than a regular variable rate. Also, if you decide to discharge the mortgage early on a traditional variable rate, then the penalty is only three months interest. This is usually not worth the premium to have an open mortgage.

Banks devise mortgage products to earn money based on client fear. If borrowers are fearful of risk, then they will create a product that takes advantage of this risk. In each case of hybrid mortgages, the risk is absorbed by the bank with a premium charged to the borrower. If your looking for a low rate, and can handle the risk, then a traditional variable rate mortgage is the best choice.

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