Fixed Rate versus Variable Rate Mortgages
Posted by Brad Speniel | May 22, 2015 at 11:58 am
ESTIMATED READING TIME: 3 minutes
When you see the mortgage rates being advertised by financial institutions, you may think your mortgage worries are over. All you have to do is lock in for the next five years and you are set. But it’s not that easy. Right now, the lowest available rate – and the one that makes
the rate sign look great from the street – will be for a variable mortgage. With a variable rate mortgage, your mortgage rate will move in conjunction with your lender’s Prime lending rate, which in turn tracks the Bank of Canada’s benchmark rate, and will typically be quoted as Prime minus a specified percentage. So, there is no way real way to
predict how your rate will vary in the upcoming years.
Fixed rate mortgages
With a fixed-rate mortgage, your payments are fixed for the term of the mortgage, which offers stability. And because of changes to mortgage rules, locking in for five years or longer allows you to borrow more. Fixed-rates are usually better suited to first-time buyers or those who have high debt levels and can’t afford an increase in rates.. When you
work with a mortgage broker to find your mortgage solution, you will be asked these questions: Do you like or need to know exactly what your payment is going to be over a longer period of time? Do you want to avoid the need to consistently watch rates? Do you have less than 20% down? If you answered “yes” to all or most, a fixed-rate mortgage could be the better choice for you.
Variable rate mortgages
A variable-rate mortgage is best suited to people who have a flexible budget and can tolerate higher risk. Your mortgage broker will want to know: Do you watch market conditions? Can you handle any sudden rate increases that could increase your payment? Do you have more than 20% equity in your home? If you answered “yes” to all or most, a
variable-rate mortgage might best suit your needs. Most variables allow you to exercise an option to “lock in” a fixed rate at any time for the remaining portion of your mortgage term or longer.
Fixed rate versus variable rate
If the uncertainty of a variable rate is going to be anxiety inducing, you are not alone. Many Canadians prefer the certainty of a fixed-rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plan accordingly – with no financial surprises. However, a variable rate mortgage in a stable market where the Prime rate doesn’t change can save you money. Your best option is to have a mortgage broker help you decide which financing best meets your needs and then shop over 50 lenders to get the best solution for your unique situation.