After you’ve chosen what house you want to call home, the next most important decision is whether you want a variable or fixed rate mortgage. Like anything when it comes to your finances, the choice is not cut-and-dry. Some people will benefit more from one over the other, the tricky part is deciding which is best for you. In this week’s article we are going to explore the pros and cons of each mortgage type, and what that means for homeowners.
What is it: Variable interest rates fluctuate from month to month based on market rates. This means mortgage payments can potentially change from month to month.
Generally lower rates and more money saved over time.
As market rates change over time, homeowners who plan on selling their home before their amortization period is complete tend to benefit the most.
Some lenders will offer interest rate caps or a convertibility feature.
The fluctuating payments each month can be a huge financial challenge for homeowners with less disposable income.
Rate changes are difficult to predict. For example, according to the Bank of Canada, interest rates varied from 0.5% all the way up to 4.75% between 2005 and 2015.
What is it: Fixed interest rates stay the same for the duration of the term. This means mortgage payments are the same amount every month.
Payments remain the same over the term of the mortgage, allowing homeowners to effectively build and follow a monthly budget.
Homeowners know exactly how much of their mortgage will be paid off by the end of their term.
Interest rates remain the same even if there is a spike in market rates.
In the case of a falling market, fixed rate mortgages will cost more in the long run.
Some lenders will charge extra fees if homeowners decide to switch providers during their renewal period. This is because they don’t want to lose the interest guaranteed by your mortgage.
In short, variable rate mortgages offer potential savings, whereas fixed rate mortgages offer predictable payments. It’s important to evaluate your financial situation and work with a local mortgage broker to determine which mortgage style is right for you.
Source was absolutely great to work with - went above and beyond to help us get everything done when buying our new home. Highly recommended!! Chad and Jenelle Richards Jan 09 2013
Chad and Jenelle Richards
Added January 23rd 2013
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