In making a decision to purchase, refinance or transfer your mortgage, you will be faced with the option to select either a fixed or variable mortgage. The option you choose will determine the interest rate you will have over your mortgage term and will directly influence your payments. Ideally you want the lowest interest rate possible, however there are factors that play into both fixed and variable rates that need to be considered before making any decisions.
Fixed mortgage rates are just that – a fixed rate for the entire mortgage term. Your payments will never fluctuate and there will be no uncertainty surrounding the impact of economic conditions because once this rate is locked in it is held for the entire term. Fixed rate mortgages are safe, secure and a great idea for people who are on fixed incomes, first-time homebuyers, or people who prefer a more cautious approach and value having the same payments every month.
With that in mind there are drawbacks to this approach. If the best rate in the market was 6.50% when you took out your mortgage three years ago, it can quickly become less attractive if the market has come down to 4.0% for the same mortgage term. In short, fixed mortgages provide stability but they don’t offer any benefits or consideration if the market interest rates drop.
Variable mortgages are based around the prime lending rate. Prime is determined by the Bank of Canada and is adjusted up or down depending on the country’s current economic situation. Variable rate mortgages take the prime rate and then provide a rate adjustment in addition to it. For example, prime – 0.50% is the Bank of Canada’s prime rate less a discount that the lender is willing to offer.
Because the variable depends so heavily on economic conditions, a downturn in the economy can be beneficial as the prime rate is adjusted downwards to encourage spending. In this environment, a variable mortgage is at a significant advantage because the rate can be significantly lower than the fixed. If the economy improves, however, the prime rate will be adjusted upwards and what was once an excellent rate will be on par if not higher than what the fixed rates were at the time the mortgage closed. This risk is why a variable can be a very rewarding proposition in the right market conditions.
Built into all of the variable mortgages we sell, however, is the option to lock in to the best available fixed rate at that time. This option can be utilized at any time with no penalty. The drawback to this is that by the time the variable rate is going up, fixed rates have likely increased as well so it can be a difficult decision when to lock in. Additionally, once you have locked into a fixed rate, you cannot go back to a variable if you would prefer to change back.
Variable mortgages offer many benefits at a higher risk. We recommend this product to people with a larger disposable income who can weather periods of higher payments as well as people who are market savvy and not afraid of changing payments.
To keep an eye on fixed and variable interest rates, sign up for our mailing list (you’ll find it below). We send regular emails updating you on changes in the market, helping you to make educated decisions surrounding which option will suit your needs better.
Have a mortgage question? Ask an expert or call our office at 905-304-6963.