Do you know the difference between fixed-rate mortgages or variable (sometimes called adjustable-rate) mortgages? Each mortgage type is affected by different market conditions and each offers its own advantages or disadvantages. One of the most important steps in financing your home is choosing which type of mortgage suits your individual situation best.
Fixed-Rate Mortgages
In Canada most mortgages are 5-year “fixed-rate” terms. A fixed-rate mortgage has an interest rate that is “fixed” for the term of your mortgage. It does not change. As a result, the mortgage payment will not vary and the amount of principle and interest paid is completely predictable.
The largest advantage of a fixed-rate mortgage is the protection from rising interest rates (since your rate is “fixed”). At the end of the term you would renew your mortgage at the rates that are in place at that time. Like most homeowners, if you need to keep your payment within a budget this is the choice for you.
The potential drawback of a fixed-rate mortgage is that if interest rates decline you cannot easily take advantage of that. It is also potentially more expensive to break this mortgage before your term matures.
Variable / Adjustable-Rate Mortgages
A variable or adjustable-rate mortgage is exactly what it says. The interest will change (increase or decrease) based on market conditions. Specifically, on what the Bank of Canada does with the Prime Lending Rate. If they increase it your rate (and mortgage payment) will increase at the same time. The same with a decrease. Your mortgage payment in most cases does not remain the same. The Bank of Canada meets eight times a year to determine this rate.
One of the biggest advantages to a variable rate mortgage is the potential interest cost savings. Your interest rate is set based on a discount from the Banks Prime rate. Today, the prime rate is 3.45%. The average discount below that is .80% for a rate of 2.65%. This is lower than fixed rates. Because of the lower rate, your mortgage payment may be smaller.
However, the drawback of a variable rate mortgage is that if rates rise so does your payment and interest cost. It is not predictable like a fixed rate mortgage is. If you have a fixed budget, this may not be the product for you.
Your choice will depend on your own personal finances, current interest rates and market trends. If you need assistance in choosing which mortgage is right for you, please don’t hesitate to contact Capital Mortgages today.