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Fixed or Variable Rate Mortgage – Which is Right for You?

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Once you have an accepted offer on a home, you must choose the type of mortgage you would like to have. Do you want a fixed or variable rate mortgage? 

Most people opt for a fixed-rate over a variable rate because of its simplicity and stability, but it’s not the only option. Variable rate mortgages have advantages too.

Check out the difference between a fixed rate and a variable rate and how to tell which option is right for you.

What is a Fixed Rate Mortgage?

A fixed rate mortgage has one interest rate for the term of the mortgage, for example a 5-year fixed term. A fixed rate mortgage also has the payment for the term. For example, if you have a 5-year term, your payment remains the same for 5 years. If the lender is also collecting your property taxes, your payment may change slightly as those payments change.

Learn more: Fixed Rate Mortgage
Learn more: Best Mortgage Rates Ottawa

Pros and Cons of a Fixed Rate Mortgage

Pros:

  • Easy to budget with a fixed mortgage payment
  • You pay off a portion of your principal each month
  • You do not have to worry about interest rates increasing

Cons:

  • Fixed interest rates are typically higher than variable rates
  • You must refinance to take advantage of decreasing rates
  • Penalties are typically larger than variable rate penalties

What is a Variable Rate Mortgage?

With a variable rate mortgage you potentially has different interest rates during the term. A variable rate is typically offered for a 5 year term. 

If the Bank of Canada changes their overnight rate, your mortgage payment or amortization may change. The lender ties their Prime rate to this Bank of Canada benchmark rate. However the lender will add a premium to or subtract a discount from their Prime rate. For example, a variable rate mortgage with Prime minus 0.6%. Your premium or discount will stay the same as Prime changes, for example the 0.6% discount, as this is locked in for the 5-year term. 

Learn more: Bank of Canada Policy Interest Rate

Pros and Cons of a Variable Rate Mortgage

Pros

  • Usually a lower rate than a fixed rate
  • Your interest rate can decrease if Prime decreases
  • The penalty to break the mortgage is typically less than a fixed rate penalty 

Cons

  • Interest rates can increase if Prime increases
  • Mortgage payments can become unaffordable if they increase too much
  • Budgeting is difficult when you don’t know how much your mortgage payment will be is rates change

Which Mortgage is Right for You?

The choice between a fixed and variable rate is a person one. 

Some questions to ask yourself to help you decide are:

  • Are you willing to take the risk of your rate changing in order to achieve a lower rate upfront?
  • Would you rather have a smaller penalty in case you need to break your mortgage?
  • Would you rather have a smaller penalty in case you need to break your mortgage?
  • Do you feel rates will increase or decrease over the next five years?
  • Do you stay up to date with changes in the economy?
  • You know what payment you are comfortable with today however if rates change, would you be comfortable with a higher payment?
  • Would you like to have the same payment for the mortgage term?

Typically most people have a gut feeling on if they would like to go fixed or variable and asking yourself the above questions can assist with your decision.  

If you would like to talk about fixed and variable rates more, I would be happy to review with you. 

About Andrew Thake

"My name is Andrew Thake. I’ve been a mortgage broker and agent for over 15 years, and in that time I’ve helped over 2200 happy clients find the right mortgage solution for them and their situation."

Why not make your mortgage experience a comfortable one?

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