Choosing Between Mortgages: Fixed Vs. VariableJune 10, 2013
Homebuyers and mortgage shoppers continue to debate over the dilemma of which mortgage to pick from when it comes to Fixed Vs. Variable. Before homebuyers select a mortgage, they need to consider their budget, their affinity for risk, and their future goals. Analyzing the pros and cons of fixed and variable mortgages ensures that potential buyers can feel confident in their mortgage decision.
What Is The Difference Between Fixed And Variable Mortgages?
Variable mortgage rates have a month-to-month fluctuation in their interest rates based off of the prime-lending rate that’s preset by the lender. Variable rates will quote a prime +/- a specific amount, and they may fluctuate within the prime-lending amount. While the prime-lending rate is likely to fluctuate, the association to prime will remain constant over the term. Fixed mortgage rates are “locked in,” suggesting there are no fluctuations in the interest rates. This means that the mortgage rate, and the monthly payments under the mortgage will stay constant throughout the term of the mortgage.
Comparing Fixed Mortgage Rates To Variable Mortgage Rates
When examined historically, variable Canadian mortgage rates are less expensive over a longer term when compared to fixed Canadian mortgage rates. The variable mortgage rates Canada has to offer can cause financial hardship on individuals due to the uncertainty of the prime rates. If the prime rates increase, the monthly interest payable also increases, causing a financial burden.
Whereas with the fixed Canadian mortgage rates, homeowners have the luxury of setting their rates and forgetting about them until their mortgage opens again. Regardless of the increasing or decreasing of the interest rates, the fixed homeowner’s monthly payment will stay the same, easing their financial burden.
When interest rates are at a low and are not foreseen to lower further, this is the time when homebuyers benefit from a fixed mortgage rate when compared to a variable mortgage rate. This is because variable mortgage rates will likely stay the same or increase, whereas, this is the recommended time to lock in fixed mortgage rates ensuring the lowest mortgage rates available.
The flip side to this is when there is an expectance of a decrease in the interest rates. This is the prime time to decide on a variable mortgage because homeowners will be able to absorb the benefit of lower interest payments.
Which Mortgage Option Is The Best?
Both fixed and variable mortgages have their own advantages and disadvantages. New homebuyers often opt to take on a fixed mortgage for the security and stability it provides them with throughout the term of their mortgage. Shoppers who have less debt remaining on their mortgage tend to opt for a variable mortgage because they have the ability to benefit from paying less interest.
Determining whether a homeowner should go with the variable or fixed-rate mortgage is an exercise in experience, speculation, and affinity for risk. It’s important to use the services of a financial planner or experienced mortgage broker to obtain the best mortgage for your situation.