As you drive around the city, you see signs with mortgage rates that seem too good to be true. Those are usually variable rates. They are usually half a percent lower than fixed ones. What are the differences between those two? And what would be right for you?
Fixed-rate mortgage guarantees that your payments are fixed for the term of the mortgage, which offers you stability and peace in mind. If you are a type of person who can’t sleep at night, concerning if tomorrow the Prime Rate will change, than fixed rate is the solution for you. You can plan your budget with confidence for next three, five, ten years. Fixed rate would be a great option for young families who just had kids and cannot afford having sudden surprises in near future.
Also, due to mortgage rules changes, locking in for five years or longer allow you to borrow more. Why? If variable rate doubles tomorrow, you have to be able to afford higher payments. The lenders, when they calculate how much you can qualify for, always prefer to leave a room for such changes. Therefore, you are being approved for lesser mortgage amount than if you went fixed root.
Variable rate mortgage means your mortgage rate will change in according with your lender’s Prime lending rate, which in turn tracks the Bank of Canada’s benchmark rate, and will typically be quoted as Prime minus a specified percentage. Regardless to what some experts will tell you, it is impossible to predict how your rate will vary in the upcoming years. Therefore, variable rate is a good option for people with high risk tolerance and people who can afford higher monthly payments if interest rate changes.
If the uncertainty of a variable rate is going to be anxiety inducing, you are not alone. Many Canadians prefer the certainty of a fixed-rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plan accordingly with no financial surprises. However, a variable rate mortgage in a stable market where the Prime rate doesn’t change can save you money. Your best option is to have a mortgage broker help you decide which financing best meets your needs and then shop over 50 lenders to get the best solution for your unique situation.