To help you determine the right mortgage rate for your needs, we will take a closer look at:
· The features of variable vs. fixed mortgage rates
· Their pros and cons
With a better understanding of these two options, you can make a smarter decision when you apply for a mortgage, renew, switch, or refinance.
Understanding fixed-rate mortgages
When you have a fixed-rate mortgage, your interest rate will remain the same for the duration of your mortgage term.
Whether rates go up or down, your interest rate will not be affected and you will pay the same amount every month. Because you are guaranteed a consistent rate, a fixed-rate mortgage carries a higher interest rate than a variable-rate mortgage.
Many Canadians go with 5-year terms but it is possible to get a fixed rate from 6 months to 10 years. However, the shorter the term, your rate may be better. When you choose longer terms, you buy a guaranteed rate and this means sacrificing your potential to get a lower interest rate in the near future.
Basic features of fixed-rate mortgages
· Locked-in rate for the term of the mortgage (usually 5 years)
· Generally higher rates but more stable and consistent mortgage payments
· Usually includes a penalty for breaking your mortgage contract such as if you switch from fixed-rate to variable or if you refinance or change lenders.
Understanding variable rate mortgages
For variable-rate mortgages, the rate changes along with the prime lending rate.
Variable rates are generally lower than fixed rates at any point in time because they are considered by lenders as less risky.
With a floating interest rate, the interest portion of your mortgage payment changes. Many borrowers are attracted to variable rates because should interest rates fall, the interest will also be reduced.
Take note that even with a variable rate mortgage, your monthly payment will be the same each month. Only the portion of your payment applied to the interest changes. Thus, when the rate goes down, the portion that goes toward your interest increases, and this will help you pay your loan faster.
Basic features of variable rate mortgages:
· Fluctuating interest rates based on the Bank of Canada
· Lower interest rates than fixed rate mortgages but with the possibility of higher rates depending on the market
· Lower penalty fees for breaking your mortgage
· Less stable and consistent mortgage payments due to the changing interest rate
· You can switch from a variable to a fixed-rate mortgage at any time
Now that you know the basic features of fixed-rate and variable rate mortgages, let’s take a look at their pros and cons.