Fixed or Variable Rate Mortgage?

Many people don’t know what to look for when choosing their mortgage.  Do you need a fixed or variable rate mortgage?  The answer is not always straight forward, here are a few key issues regarding the two most popular types of mortgage rate options:

Fixed Rate Option

The most common repayment option in Canada today is the Fixed Rate option, this simply means the rate is fixed and will not change throughout the term of the mortgage.  The main benefit of the fixed rate option centers around security.  As a borrower; you know exactly what your payment will be for entire term of the mortgage; allowing you to budget accordingly.  This type of security can be especially important for first time home buyers; who may be renting and used to paying a fixed amount for shelter every month.  Home ownership brings many new and unexpected expenses; many of which first time home owners are not aware of.

The fixed rate mortgage payment is a combination of interest and principal, and it remains constant throughout the term.  However, over the term (normally 5 years) the portion of interest and principal will change every month as the amount of interest owing decreases.  If you have this type of payment; have a look at your statement and see the declining amount of interest paid each month.

As a borrower, there are no basic risks attached to this type of mortgage repayment plan other than the fact you may not save as much interest when comparing it to the variable rate option.

 

Variable Rate Option

While there are different types of variable rate mortgages available, the main feature is that a variable rate mortgage has an interest rate that will fluctuate.  This type of rate transfers the interest rate risk from the lender to the borrower; and therefore the borrower will receive a lower rate than on a fixed rate mortgage.

You can choose to have a variable rate mortgage with a constant payment or a fluctuating payment.  If you choose a constant payment and the rate goes up, more of your payment goes to interest and less to principal, vice versa if the rate goes down.  If you choose a fluctuating payment, your mortgage payment will rise and fall with interest rate fluctuations.

For borrowers who are not risk sensitive, this type of payment plan can save you a lot of money.  Most lenders will also allow you to switch to a fixed rate mortgage without penalty if the interest rates start to rise.  You should calculate in advance the maximum mortgage payment you can afford and keep an eye on the rates to know when you should switch to the fixed rate option.

When considering different mortgage payment options it is important to access your individual needs; including your risk tolerance, intentions on moving, debt expectations and saving habits.  If you need help finding the right lender with the right rate option give me a call, I would be happy to help.

Have a great weekend,

Tracey

 

 

Note:  All mortgages are sold through Centum One Financial Group.

Source:  Mortgage Brokering in Ontario Agent edition, Sixth Edition, Joseph J. White.