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One of the most important questions you will face during the home-buying process is whether to go with a fixed or variable rate mortgage. It’s a decision that many buyers stumble over—and with good reason.
The debate between fixed and variable has become over-complicated thanks to recent interest rate hikes. For years variable rate mortgages held the title of being more affordable thanks to low interest rates. But with the Bank of Canada expected to make a series of interest rate adjustments in the coming year, many are finding themselves curious about switching to a fixed rate.
Whether you are a first time buyer or your mortgage is up for renewal, it’s important to weigh the pros and cons of each mortgage type before deciding which option is right for you. Here are a few things to consider when comparing fixed and variable rates:
A fixed rate mortgage is pretty straightforward. Your lender will quote you on an annual percentage rate and term—say 3.49 per cent for 5 years on a $400,000 loan, amortized over 30 years. Your loan payment, interest, and any associated expenses will be added together and divided to make up your monthly payment.
That means you won’t have to worry about any fluctuations in your mortgage payment month-to-month, making budgeting a breeze. But you may end up paying a premium for the stability and protection of a fixed rate.
A variable rate mortgage will also have a fixed term, but your interest rates will change regularly based on any movement of the prime or overnight rate set by the government. If rates decrease, more of your regular monthly payment is applied to your principal. But if rates increase, more of your payment will go toward the interest. So, while your rate may be lower than that of a fixed, you’ll have to deal with some financial uncertainty and unpredictable payments.
The penalties of breaking your mortgage are also cheaper with a variable-rate. You’ll only be charged 3 months interest at any given time should you choose to break your mortgage during the term. That may offer some financial reward to those who don’t plan to spend a lot of time in the house they are mortgaging.
What Does that Mean for You?
Regardless of rising interest rates, both variable and fixed rate mortgages have their selling points. What it comes down to is your level of financial comfort and your long-term goals.
When you work with us, we’ll crunch the numbers for you so you can see how each option fits into your budget. Our job is to find the mortgage that works best for you, so you can carry on with your day-to-day life without the stress of a mortgage you can’t afford.
That goes for current homeowners too! If you have a variable-rate mortgage and you’re concerned about rising rates, it’s never a bad idea to check in and review your options.
If you have a comment about this blog post, have questions about the different mortgage types we provide or wish to ask any other questions about how to get a mortgage from CVE Mortgage Group, please feel free to contact us