What is the best mortgage product for you? It depends on your financial situation and what your financial goals are. If your mortgage has a fixed rate, the interest will be the same for however long your term is. This means if your term length is five years, and interest rates go up, you’ll be protected. However, if they go down, you’ll still be paying the same amount in interest. Alternatively, a variable interest rate is at the mercy of the market. If prime rates decrease, your rates will go down as well. So, which is best for you?
To help simplify the process, and to give you more to think about, we wanted to review some of the characteristics of both fixed and variable-rate products. Let’s weigh the pros and cons of fixed and variable-rate mortgages!
Fixed-rate mortgages can reduce surprises
If you have a fixed rate, your mortgage will be, well, fixed until your mortgage needs to be renewed. The benefits of fixed rates are two-fold. Rising interest will not have an impact on your mortgage payments until it is time to the end of your term. This also means that for the term of your mortgage you will know exactly what you will be paying. This stability can help make your payments more manageable. It will allow you to be exact in your budgeting and set up automatic payments if you find it easier to manage your payments that way. Fixed-rate mortgages are common for individuals who are worried about changing rates. Losing sleep over your mortgage isn’t healthy, and a fixed-rate product can help ease your mind.
Sometimes fixed can also mean stuck…
The advantage of a fixed-rate mortgage is also the biggest disadvantage. The interest rate you locked in will not change until the end of term. If interest rates go up, you will benefit from your fixed-rate product. If interest rates go down, you may miss out on an opportunity to save money on interest.
Another common issue with fixed-rate mortgages comes down to prepayment privileges. A prepayment is when you pay off your mortgage balance before the maturity date. Prepayment privileges depend on whether you have an open or closed mortgage. Open mortgages allow you to pay off the balance in full at any time, without penalty. Closed mortgages provide limited prepayment privileges and have high penalties to break your mortgage term. In addition, open mortgages typically have higher interest rates than closed mortgages.
It’s important to understand your goals before you pick a product.
Variable-rate mortgages can create opportunities
The pros of a variable are the cons of a fixed rate. If you have a variable-rate mortgage, your interest rates rise and fall according to changes in the prime rate.
Similar to the fixed rate, variable-rate mortgages can be open or closed, offering different prepayment privileges. The major difference between the two rate types comes down to the penalty. Variable-rate mortgages have a penalty capped at three months of interest. So in the event that rates change, or you are losing sleep at night over market conditions, it’s easy to switch into a different mortgage product with a well-understood penalty. Take a look at a recent CBC News article where one of the major lenders charged a homeowner a $30,000 mortgage penalty.
Even if you’re not planning your next renewal in advance, variable-rate products can offer flexibility depending on your needs. Maybe you want to sell in a couple of years, purchase a bigger property, or secure a lower interest rate. Variable-rate mortgages can offer you some opportunities that fixed-rate products cannot. As we mentioned before, it is important to speak to an unbiased mortgage broker when you’re looking for the best product for your needs.
Sometimes variable rates can create uncertainty
A variable rate is the classic case of risk and reward being entwined. You might have an opportunity to save money in the event that prime rates decrease. Additionally, you will have a much more predictable penalty if you want to refinance your home in the future. If you don’t plan on moving during the term of your mortgage, or foresee the need to refinance your home, you may create extra stress by choosing a variable-rate product. It’s important to understand your financial situation and goals when deciding on an interest rate type. Although the overall interest savings in variable-rate mortgages can be greater, including greater flexibility, there can be less stability in choosing a variable-rate product.
Deciding between fixed and variable is all about priorities
At the end of the day, which of these two options is right for you will ultimately come down to your situation and your preferences. If you prefer to have more flexibility to pay off your mortgage as soon as possible and expect the market to be stable, a variable rate might be the right choice for you. If you prefer to have the security of knowing exactly what you’ll be paying in mortgage payments every month, regardless of market conditions, a fixed rate product might be better for you.
Weigh your personal preferences and that of your family’s against your financial reality to determine which is best for you. It is important to talk to an unbiased mortgage broker to understand your financial situation, your financial goals, and to decide what mortgage product and interest rate type makes sense for you.
If you are considering buying a home and need some advice picking the right mortgage rate for your goals, give me a call at (705) 333-4338 or get in touch with me here!