Whether you are purchasing for the first time, or a seasoned real estate investor, one of the key concepts to understand is main difference between fixed and variable rate mortgages. In fact, this is probably the most widely asked question from perspective mortgage shoppers.
Let’s look at the main differences together.
First, let’s look at the “Fixed” rate mortgage option
With a fixed rate mortgage you can essentially “lock in” a predetermined rate for the term you have selected. (For example. 3.29% fixed for a 5 year term).
One major benefit of fixed rate mortgages is that it gives greater peace of mind for those who prefer to know exactly what their mortgage payments will be for the duration of their selected term. This option definitely makes budgeting easier and helps with long term financial planning.
Now let’s look at the “Variable” rate mortgage option
A variable mortgage rate will change based on the prime rate. The prime rate is the interest rate banks in Canada charge borrowers with good credit ratings. Lenders all base their variable mortgage rates based on the prime rate. (For example, if a lender is offering a variable rate of Prime – 0.5%, and the prime rate is 3.0%, then your variable rate mortgage would be at 2.5%.) This means your mortgage rate changes with the changes to the prime rate. If the prime rate goes up, so does your mortgage rate. On the flip side, if the prime rate goes down, your mortgage rate will also go down as a result.
You have to remember that the prime rate can change several times a year and therefore variable rates are not for you if you will lose sleep over this fact. I would say that if you are going to take on a variable mortgage rate, you should be able to handle changes to your monthly payments both from a financial and psychological perspective.
Historically speaking, variable rate mortgages have usually outperformed fixed; in fact, that has been true about 90% of the time when looking back at the last 25 years. However, things have changed considerably since current fixed rates have dropped to historical lows. For quite possibly the first time in decades more and more people are opting for fixed rate mortgages to try and hedge against the risk of rates rising back to normal levels.
I work with my customers to make sure they understand these differences in relation to how it affects them. Contact me for a more in depth look at your options.
Watch this helpful video to understand the differences between fixed and variable rate mortgages
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