As a home buyer, you’ll inevitably have to decide between committing to a fixed rate or variable mortgage loan. While both have their benefits as well as their drawbacks, one will likely be better than the other depending on your unique situation (i.e. lifestyle, finances, risk and reward tolerance etc.). Here’s what you need to know:
Variable Rate Mortgages
A variable interest mortgage (sometimes referred to as an adjustable-rate mortgage) is a form of home loan in which the interest rate “varies” according to current market conditions. In this situation, the lender will offer you a loan at Prime rate (the interest rate set forth by the Bank of Canada) plus or minus a certain percentage.
For instance, if Prime is 3.00% and you opt for a variable rate of Prime – 0.45, you’ll be paying an interest rate of 2.55%. On a $300,000 home, with a minimum 5% down payment, your monthly mortgage would amount to $1,319.00. *
In short, as the Prime rate fluctuates, so too will your mortgage rate – ultimately affecting how much you can expect to pay monthly.
Is a Variable Mortgage Right for Me?
- Lower rates
- Potential for increased savings
- Market volatility (high risk)
- Monthly unpredictability
A variable mortgage might be the right option for you if you’re able to weather the risk of increased payments in favour of long-term savings and/or paying off your loan faster. While variable rates have historically been found to be cheaper, they can result in unpredictable month to month payments – with the potential to become quite expensive should interest rates rise.
Fixed Rate Mortgages
Fixed mortgages, on the other hand, represent a “fixed” interest rate. Set for the duration of your term, this option affords homeowners a predictable monthly payment that will remain the same despite fluctuating interest rates. Fixed rates are typically determined by Canada’s bond market and lenders determine individual rates based on how much they lend and how much they invest (in bonds).
For example, the same $300,000 home (with 5% down) on a fixed five-year rate of 2.93% would result in a monthly mortgage payment of $1,375.00. *
Is a Fixed Mortgage Right for Me?
- Stable payments
- Exemption from market volatility
- Higher rates
- Stability vs. savings
A fixed-rate mortgage is a good choice for homeowners looking for predictable, set monthly payments. The interest rate on these loans does tend to be higher, however, the cost may be offset by locking in while market rates are relatively low.
Overall, the best way to choose which rate is right for you is by doing your research. Shop around to compare interest rates and terms and speak to your lender or broker – they’ll be able to help you determine what will benefit you most in the long run.
Terry Paranych on