With lots of different options and choices available to you, and every lender attractively packaging each offer up, it’s important to know what to look out for, and which mortgage rate is the best choice for your individual circumstances.
In this article, we look into what the benefits of each option are in some detail. The purpose of this is to help you to understand precisely which type of mortgage is the best fit for your individual circumstances.
Fixed Rate Mortgage
This is a type of mortgage which can actually run over any number of terms. It could be one year, three years, five years or even ten years. Throughout whichever term you choose, the interest rate is fixed and will not change at all over your term. Once you agree to sign up to a fixed-term mortgage, you then lock in your interest rate for the entire term of the mortgage.
Why is a Fixed Rate Mortgage a good option?
A major reason that people choose a fixed rate mortgage is the ability to be able to know exactly how much their monthly repayment will be. This helps people to budget and ensure that they are able to afford the payments. It provides a certain level of security in that respect because your mortgage payments will stay the same throughout the term. It is common for people to want to know what they will be paying in year 1, 2, 3 and so on. The fixed rate mortgage is the only type of mortgage that will offer this.
Variable Rate Mortgage
A variable rate mortgage will generally run over three or five years. The interest rate will move in sync with the prime rate that is held by your mortgage lender. When your mortgage provider offers a variable rate mortgage, they will present an offer which gives you an interest rate that is founded off the prime rate. An example of this would be typically Prime-1%. This equates to the prime rate of interest minus 1 percent. Because the prime rate varies over time, this is why it is offered in this way. So in year 1, the prime rate might be 5%, then in year two it could decrease to 3%.
Benefits of a Variable Rate Mortgage
If you choose to go for a variable rate mortgage, you could find yourself paying a much lower interest rate than you would with a fixed rate mortgage. Although this is a great perk, it is important to mention that these interest rates can change, once you sign-up to this, it is likely that your payment amounts could be subject to change. With a fixed mortgage the penalties do apply if your sell or break the mortgage before the end of the fixed term. If you may break your term early a Variable is a better option.
Which Is Best?
There isn’t really a straight answer to this question. Although historical data shows that in Canada a variable rate has performed better: there is no guarantee this is going to be the case in the future. A fixed rate mortgage gives a certain level of assurance that your payments will not change, this helps for budgeting and it helps with planning. If there is a sudden movement in the mortgage rates in Canada, and you have a variable rate mortgage, this can seriously affect your repayments, with a fixed rate mortgage it would have no impact at all.
If it is likely that interest rates in Canada will rise, or, perhaps you are not comfortable with any penalties should you decide to sell your home before your mortgage term is through, then a fixed rate mortgage is the best option for you to consider. A variable rate, on the other hand, is better suited to you if the interest rate is fairly low and looks set to stay that way, sometimes floating along with the rates of interest set by the Bank can deliver a reduced amount of interest to pay. It can also suit you if you are looking for the flexibility to sell your home before the end of the mortgage term.