VARIABLE or FIXED RATE
The gap between variable rate mortgage and fixed rate mortgage products has narrowed in recent years
The gap between variable rate mortgage and fixed rate mortgage products has narrowed in recent years. And while fixed rate mortgages are starting to rise they offer certainty in a monthly payment. On the flipside, variable rate mortgages remain low, but are the riskier of the two mortgage choices – so what do you choose a fixed or variable mortgage?
Your income, lifestyle and risk tolerance will weigh heavily on your decision and will inevitably determine which mortgage product suits your circumstances.
Fixed Rate Mortgage
Fixed rate mortgages are the predictable option.
The rate you secure remains consistent for your mortgage term, meaning your monthly payments (however you structure them) stay the same.
What is the main benefit of Fixed Rate Mortgages?
Peace of mind: Make predictable payments with no surprises. Perfect for the risk-averse.
The downside? There is the potential to miss out on decreasing interest rates over your term. Plus, if you needed to get out of your current term, you’ll likely incur a larger penalty.
Variable Rate Mortgage
Variable rate mortgages have a fixed term and a fluctuating interest rate based on any movement in the lender’s prime rate.
It is important to understand how your provider arranges payments
In some cases, your mortgage payments remain the same for the term, the amount paid toward the principal hinges on the interest rate at the time – if the prime rate goes down, more of your payment will go toward your principal. And if the prime rate goes up, you guessed it; you pay more in interest.
In some instances, payments may vary with changing interest rates
This may make budgeting difficult, however, in a rising rate environment it helps to ensure payments are being applied in line with your original amortization, so you don’t fall too far behind.
Why Choose a Variable Rate Mortgage?
Initial Savings
Typically, variable rate mortgages carry a lower interest rate than their fixed counterpart allowing you to take advantage of savings initially, and potentially through to the end of your term.
Remember: Prime rate is subject to change and has increased three times in 2018. It’s important to assess how any interest rate bumps will impact you financially.
Lower Financial Penalties
If you sell or choose to refinance your mortgage mid-term, the penalty to break contract will only cost you three months’ interest. Whereas breaking a fixed rate mortgage (closed) carries a penalty of the greater of three months’ interest or interest-rate differential (IRD).
You Are OK with Risk
If the thought of fluctuating interest rates doesn’t faze you, there’s potential to save by choosing a variable rate mortgage.
The Downside
There is always a chance that increasing interest rates could work against you.
