Kitchener Waterloo Cambridge and Guelph Mortgage Source
One of the biggest decisions to make when purchasing a mortgage is whether to take a fixed or variable interest rate. Many articles and mortgage professionals tend to lean towards one or the other, however it could be dangerous for you to be persuaded towards fixed or variable products by someone who is trusted and biased. In my opinion, the best person to make the decision is an educated purchaser, him or her self.
So, the remainder of this article will objectively explain the pros and cons of variable and fixed rates, and then will provide short profiles of who generally fits which mortgage category respectively.
Fixed Rate Mortgage:
This refers to the fact that the interest rate is fixed and does not change for the entire mortgage term.
Pros:
-
Security: The central benefit of choosing fixed is its security feature.
-
The borrower knows that the payment is the same throughout the entire term of the mortgage and can budget accordingly.
-
If interest rates increase, fixed interest and payments remains the same.
-
Many first time home buyers are used to fixed costs every month (like rent payments) and are comforted by the continuation of this practice.
-
If inflation continues to increase, perhaps even more substantially, your home value and income should rise, but your mortgage payment will remain the same.
Cons:
-
The only downside to having a fixed mortgage is the potential lack of savings. I emphasize the word ‘potential’ because a variable rate mortgage could end up costing more than fixed if rates increase.
Variable Rate Mortgage:
The interest rate on variable mortgages fluctuates according to the prime rate as set by the Bank of Canada.
Pros:
-
Over the last 60 years, mortgage studies show that variable rate mortgages have been less expensive, with lower overall interest rates than fixed rate mortgages. Specifically, on a $100,000 mortgage, the average savings was $22,210. On the flip side, a consumer would have lost money by borrowing at the prime rate, compared to the 5-year rate, only 11.4% of the time.
-
Ability to switch to a fixed rate: Many variable rate mortgages have the option of switching to a fixed rate without penalty. This provides comfort if rates begin to rise.
Cons:
-
Volatility: While the borrower can save on interest rates by going variable, rates could increase quickly and catch the borrower off guard. A close watch should be kept on interest rates to decide when to lock into a fixed term.
-
Some borrowers may not be able to afford payments if interest rates rise.
-
The mortgage studies mentioned above include periods of time where many individuals lost their homes during relatively brief periods of interest rate spikes.
-
Professional assistance should be sought for timing a variable mortgage.
Given this information on fixed and variable rate mortgages, the following profiles may help clarify which product is right for you.
Variable mortgages are best suited for people who are:
-
Higher risk takers (would invest in more risky Mutual Funds or stocks)
-
Debt free or have little outside debt
-
Able to afford increases to their monthly payment should the Prime Rate increase
-
Budget disciplined
-
Income stability is strong
Fixed rate mortgages are better suited for people who are:
-
Lower risk takers (would purchase safer investments)
-
In debt with high monthly payments on their credit cards monthly loan payments
-
Not able to afford increases to their mortgage payments should the Prime Rate go up
-
Not good budget keepers
-
Income stability is not strong
So we can see that deciding whether to go fixed or variable can be tricky, but with the proper amount of consideration and a realistic analysis of your life situation and goals, securing the right type of mortgage is a very rewarding experience.
Have a question or comment? Feel free to post below!
Comments