The first big decision when mortgage planning is determining between a fixed vs. variable rate mortgage. Although it might seem confusing to begin, these concepts are actually quite simple.
Here you will learn about fixed and variable mortgages, the key differences between these mortgage options, and finally some guidelines on selecting the best rate for your financial situation.
A variable rate mortgage is based on the lender’s prime rate, which is typically based on the Bank of Canada’s prime rate. In short, the interest rate will vary depending on the current posted prime rate. An important factor, however, is that the monthly mortgage payments remain the same. What changes based on the prime rate variance is how much of a monthly payment applies to the principal and how much applies to interest. The long-term effect of this variance is that it can change the time it takes to pay off the mortgage.
A fixed rate mortgage stays the same for the entire length of the term. The rate doesn’t depend on any other factor and will not fluctuate across time. Since it is a guarantee of rate stability, however, the interest rate is typically higher compared to a variable rate. Most people enter a 5-year fixed rate term. Although, the term can range between 6 months to 10 years. If a term is longer, then that guarantee of stability across time will result in a higher interest rate. Meanwhile, choosing a shorter term provides less stability over time but also offers a smaller interest rate.
Every financial situation warrants a different approach to deciding between a fixed or variable mortgage. It’s best to speak with your financial adviser or mortgage broker to determine the option that best meets your goals.
If you look at the trends in mortgage rates across the country, the most common rate is fixed. Meanwhile, the rate that tends to save the most money over time is a variable mortgage. Why is this the trend?
One of the big factors when choosing a mortgage isn’t solely based on the numbers. In addition to the interest rate, risk tolerance and capacity to manage a fluctuating rate plays a large role.
Here are some points to consider when choosing a mortgage:
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