There are many members of our mortgage family with both variable and fixed rate mortgages, but why? Is one not superior to the other? We’ll break down fixed and variable rate mortgages to help you understand the benefits of each, and hopefully provide clarity towards which makes more sense for your personal mortgage situation.
Fixed Rate Mortgages
When someone says “mortgage” they often are talking about a fixed rate mortgage. With a fixed rate mortgage, you as the borrower will not see your payments change throughout the entirety of the mortgage. At the time of borrowing, your rate is determined by the prime rate (or prime lending rate) set by the major banks and financial institutions in Canada. The institutions base their rates off of the overnight rate from the Bank of Canada.
Pro – Your rate will never increase
No matter what happens throughout the life of your mortgage, your rates will never go up. If you’re paying $1,400 per month in April 2021, you’ll be paying $1,400 per month in October 2027, which makes it easy to budget your payments.
Cons – You may end up paying more in the long run
While your rate will never increase, it will also never decrease. If interest rates begin to drop, you may be missing out on opportunities to save money.
Variable Rate Mortgages
Instead of locking into the prime rate on the day you sign your mortgage, a variable rate mortgage shifts with the prime rate. This means your payments will always be different, and will fluctuate evenly with the prime rate based on a variety of economic factors. As the Bank of Canada makes changes to their overnight rate in response to these economic factors, the large financial institutions will adjust their prime rates accordingly.
Pro – potential to save money in the long run
If rates drop, your $1,400 payment can be better allocated into paying your principal mortgage. This means more money goes towards mortgage freedom, and less is lost in interest, all without having to increase your monthly payments.
Cons – if rates increase, you’ll have to increase your monthly payments
Variable rates are just that, variable. Sometimes they drop, but sometimes they rise. If you need the stability of a single value monthly payment, a variable rate mortgage could be difficult to deal with in an event that the rate increases.
Which Is Right For You?
This can be tough to figure out. Do you value the ease and simplicity of a single payment amount for the life of your mortgage, or are you willing to take the risk of paying more in the short term with hopes for big savings down the road?
If the stability of your payments is not important to you, a strategic approach may be in order. If you lock into a fixed rate while it’s low, you may be set for years to come. Or maybe you decide to go with a variable rate that begins a steady drop, saving you plenty of interest in the short term.
We know this can all be overwhelming to understand on your own, but we are here to help! We love to save our mortgage family money, no matter what. Get in touch and let us know how we can help you!