One of the biggest decisions of purchasing a home is deciding which type of mortgage makes the most sense for your purchase.
Variable rates have long been a favourite option for Canadians willing to take a risk for potential reward. In part, that’s because of a 2001 study showing that Canadian mortgage holders would have been better off almost 90 per cent of the time with a variable rather than fixed rates between 1950 and 2000. This remains to be seen in today’s current climate but most experts agree that variable mortgage generally provides reward with the risk.
Variable mortgage rates move up and down with the central bank’s trend-setting rate, meaning that the interest you pay on your loan may vary and can go up at a moment’s notice.
By contrast, a fixed-rate mortgage guarantees a set mortgage rate for the duration of the mortgage term. This means you don’t have to worry about the central bank hiking interest rates, but you also don’t reap any savings if rates do go down. Lenders also err on the side of caution, which is why you generally see fixed rate mortgages at higher rates than variable mortgages are offered.
Most variable rate mortgages also come with better terms should you have to discharge your mortgage early.
Some lenders offer a third option, a hybrid between the two options above called Closed Variable Interest Rate Mortgages. With a Closed Variable Interest Rate Mortgage, when your interest rate changes, your payment amount remains the same. However, the amount that is applied toward interest and principal will change. If your interest rate decreases, more of your payment is applied to the principal. If your interest rate increases, more of your payment will go toward the interest accruing on your mortgage. This way, you receive the benefits of potentially lower interest rates with the guarantee of a consistent monthly payment.
Ultimately, it is best to speak with a trusted mortgage professional who can better help you understand the benefits and pitfalls of all options before securing a mortgage loan. We work with the best in the business and would love to make the introduction for you. Send us a message to get started.