A fixed rate is there to protect you against future increases in interest rates. By locking in the rate, if interest rate‘s go up, you are protected.
However, if interest rates go down during the term you will have to wait till the end of the term until you can take advantage of the lowers rates. The reason for this is typically a lender will charge a penalty to break the mortgage during the term.
Learn more: The most common reasons people break a mortgage
A fixed rate mortgage provides a set mortgage rate for a duration of time. Usually up to 10 years.
With these mortgages, your payment stays the same for this period of time. This can be very handy for people on a set budget.
Variable interest rates in comparison can have the payment or amortization change as interest rates change.
With these mortgages, you know exactly what your payment is month to month.
For this security, typically they come with higher interest rates than variable rate mortgages.
Fixed rate mortgages come with many advantages. The main one being the stability of the mortgage payment and amortization. If in a fixed rate mortgage and interest rates go up, you are protected and this can in turn save you thousands of dollars of interest.
A fixed rate mortgage is a very popular option amongst first time buyers.
Learn more: First time home buyers
There are many costs associated with buying a new house and having your mortgage payment remain constant can be a big assistance with financial planning and budgeting. However, the trade-off is that if interest rates decrease during the term, you are locked into your current interest rate and would have to pay a penalty to break it.
It is important if you think you may be moving during the term to be sure that your mortgage is portable and also portable to the area you may be moving. For example, not all mortgages are portable to all provinces. Also, if you think you may be refinancing during the term it is important to choose a lender that allows refinancing or has favourable refinancing terms.
Learn more: Porting a mortgage
Learn more: Mortgage refinance.
Typically the best fixed rate mortgage will be the one with the lowest interest rate, most amount of options, and smaller penalties if you ever break the mortgage.
Learn more: Interest rate differential (IRD) penalty
To find the lowest fixed rate, I invite you to contact me anytime and we can review different lenders and rates.
It’s important to note that some lenders have reduced options on their mortgages in trade off for a lower rate.
It’s important to review the fine print as some of these options are very important and it could end up costing you more in the end with fees and penalties with these lenders.
The longer you lock in your interest rate, typically the higher the interest rate. This provides you more long term rate security but also will increase your mortgage payments.
Here are some example interest rates and terms and the effect on the payment:
2 year fixed rate mortgage: Example 1.99% rate. Mortgage payment of $1480.40. ($350,000 mortgage with 25 year amortization)
3 fixed rate mortgage: Example: 2.24% rate. Mortgage payment of $1522.93 approximately. ($350,000 mortgage with 25 year amortization)
5 year fixed rate mortgage: Example: 2.44% rate. Mortgage payment of $1557.45 approximately. ($350,000 mortgage with 25 year amortization)
10 year fixed rate mortgage: Example: 3.04% rate. Mortgage payment of $1663.63 approximately. ($350,000 mortgage with 25 year amortization).
Mortgage fine print can be quite overwhelming. Talk to the best mortgage broker in Ottawa to review the different possible fees, options and terms associated with different lenders and types of mortgages.
On the opposite side of fixed, is a variable rate mortgage. With this type of mortgage your payments or amortization can change as interest rates go up and down. Variable rate mortgages are based on the Bank Of Canada‘s overnight rate. As this rate goes up and down, your rate will go up and down.
Learn more: Bank of Canada
Variable rate mortgages come in open and closed terms. An open variable rate mortgage is similar to a line of credit.
Invite you to contact me anytime to learn more about variable rate mortgages.
At this time you will have to renew your mortgage. Typically in the months leading up to your renewal date, your current lender will reach out to you with interest rates. These interest rates however are not always the most favourable rates and it’s a great idea to shop around your interest-rate at renewal as well.
Learn more: Mortgage renewal
In Canada typically the longest term is 10 years. The longer you lock in your interest rate, usually the higher the interest rate.
You’ll have to weigh the pros and cons of the higher interest rate versus having more rate security.
Most lenders will allow pre-payment privileges and typically it averages from 15 to 20% of the mortgage amount.
Therefore, if you are looking to aggressively pay off your mortgage, it’s important to look to a lender that has larger pre-payment privileges.
Typically a monoline lender will have the largest prepayment privileges.
Learn more: Mortgage pre payment
Learn more: Monoline lenders
If your mortgage is portable then you can move to a new house and also move your mortgage with you. This is a great way to help avoid a penalty on your mortgage.
Important note that you do have to re-qualify to port your mortgage so if you are in between jobs or having challenges with your credit at the time you need to port, this may affect your ability to be approved for the port.
Learn more: How to build your credit score
The mortgage term is the amount of time that you lock in the terms of the mortgage for.
The amortization is the length of time you initially set out to pay the mortgage over. This helps establish your minimum mortgage payment. Amortizations usually go up to 25 years however there are options to go to 30 or more years as well.
The longer you have the mortgage for, the more interest you will pay.
You can always increase your payments however you cannot decrease your payments. With that, it’s important to establish a comfortable minimum payment and you can increase it if you want to in the future.
Many lenders are starting to offer a reduced options mortgage in trade off for a lower interest rate.
It’s important to explore these mortgages carefully as you may end up forgoing options that you will need in the future.
If going with one of these lenders and needing to have the options on the mortgage in the end, it could end up costing you more than the interest rate savings and fees and penalties.
Also, some lenders do not have the most favourable refinancing terms. If you think you may be refinancing during the 5 year term, it’s important to go with the lender that has strong options for this.
Get your mortgage off your mind. Contact me.