The Million Dollar Question: Variable or Fixed Rate Mortgage?
The answer - It really depends on YOUR situation! I know, I wish it was a simpler answer, but the decision between fixed and variable mortgages has to be evaluated on a case by case basis, there’s no one-size-fits-all solution.
I’ll break down some key factors to consider when deciding on a mortgage product!
Fixed Rate Mortgages
Let’s start with the definition - With a fixed rate mortgage product, the rate stays exactly the same throughout the whole term of your mortgage. The fixed rate means your payments each month will be consistent.
Who might this work for?
Clients with young growing families can be great candidates for fixed mortgages. This is because families with young children are looking for stability and less unforeseen costs. As the pandemic has shown us, childcare costs and schooling can be very expensive and situations can change quickly. Especially if you were depending on the support of extended family that can no longer fill that gap, childcare costs can be very expensive! The consistency of a fixed rate mortgage means there’s one less hurdle to navigate when it comes to monthly budgeting.
Budget-loving individuals are also suited well for fixed rate mortgages for the same reason -no surprises when planning for expenses!
Fixed rate penalties can be very high, especially when you’re with a large bank.
You can’t go from a fixed rate to a variable rate mortgage without paying a very high penalty.
Variable Rate Mortgages
Variable rate mortgage products are exactly as their name suggests, the rate you will pay is variable throughout the mortgage term.
The variable mortgage rate is determined according to the Bank of Canada interest rates, also known as the ‘prime rate’ or ‘prime lending rate’. The Bank of Canada meets 8 times per year to determine the interest rate status. They can decide whether they are going to increase or decrease the rate by 0.25%, or keep it the same. As prime changes, your rate will change which impacts how much your mortgage payment will be.
Who might this work for?
A good candidate for a variable rate mortgage product would be a family that has more wiggle room and isn’t paying a mortgage that’s already at the top of their budget.
A family with a double income who is paying a $2,500 mortgage, but has the availability in their budget to pay as high as $3,000 might be amenable to a variable rate. This means they have a $500 buffer should their mortgage payment fluctuate.
This is very important to be aware of, because if rates increase, you don’t want to be left with ‘payment shock’.
You can convert from a variable rate to a fixed rate, but some lenders may give you a conversion rate, which is higher than their regular rate.
Variable rate penalties are much less expensive, they are only 3 months’ interest compared to fixed rate. Fixed rate penalties are the great of 3 months’ interest or the Interest Rate Differential (IRD), which is a calculation using current mortgage rates and your remaining mortgage payment owing.
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