You’ve decided now is the right time to buy a home. You have almost everything figured out, except you’re stumped on if you should get a fixed or a variable mortgage rate. You’re probably wondering which of these rates will work best for you. Like with so many things, the solution largely depends on your individual situation. While this is true, you can learn more about each type of mortgage rate, understand the difference between each, and then seek professional advice.
Different mortgages exist to give borrowers options that best fit their situations. For potential homeowners, the decision of a mortgage rate has always been a point of debate. Financial decisions require a lot of thought and coming to a decision can be overwhelming.
The good news is, rates are at historical lows. Fears of a second COVID wave have caused worries that the market won’t recover. When bonds fall, the mortgage rates fall as well. This makes it a prime time to buy a house and take out a mortgage!
So, what are the different types of mortgage rates?
A fixed-rate mortgage
Over 74 per cent of Canadian homeowners have opted for a fixed-rate mortgage.
The benefit of a fixed mortgage rate is you know exactly what your payment is each month during your term.
One disadvantage of a fixed-rate mortgage is that your interest rate does not decrease with market changes. The upside to this is that your interest rate won’t rise with the market. Having said that, a mortgage term is typically five years. If you get a fixed rate mortgage in the current market, you can capitalize on historically low rates!
If you go with a fixed-rate mortgage, there is the option to break your contract before your term ends to take advantage of lower interest rates. This is a decision to be made very carefully as your penalties could potentially outweigh your savings. Penalties on fixed-rate mortgages are calculated by the Interest Rate Differential (IRD). Different lenders will have different ways of calculating this. The standard is taking the interest difference and multiplying it by your remaining balance and time.
The reason most homeowners choose a fixed rated, despite these disadvantages, is because of the security. With a fixed rate you can budget your money and avoid getting stuck in a pinch during financial hardships!
A variable-rate mortgage
A variable rate mortgage fluctuates with the market and has potential for major savings, depending on the market rate. Over 21 per cent of Canadian homeowners have chosen a variable rate because of its advantages.
One of the major advantages is prepayment privileges. If you have the ability to pay off your mortgage quickly, this is the best option. The quicker you pay off your mortgage, the less interest you’ll accrue over time. The potential savings also come in the form of a lower interest rate. If you take out a variable rate and interest goes down, you get to reap the benefits. However, the interest fluctuating with the market is a double-edged sword, and interest can rise with the market as well.
Where you have the option to break your mortgage contract during your term with a fixed-rate, you can do so with a variable rate as well. This too will incur penalties. They are less steep than those incurred by breaking a fixed-rate term, but the decision should still be made very carefully. The penalty for breaching a variable-rate mortgage is three months’ interest.
Variable rates are best for those who are in a secure financial position. It’s a risk versus reward situation. If you’re in a stable position where you can accept the risk of rising interest, the savings from pre-payments and potential savings of lower interest rates might be worth it for you.
What are your priorities?
Are your priorities potential savings, or security? If you would prefer something secure in these uncertain times, a fixed rate is best for you. If you can absorb losses but are interested in savings, or need to pay off your debts by a deadline for personal reasons, a variable rate might be best for you.
In the current financial climate, many professionals believe that having a fixed rate over the five years is better at this point, given the uncertainty of the market. Once again, it’s important to realize which mortgage rate you go with largely depends on your priorities, and reviewing your personal situation with your mortgage broker is better than generalizations.
If you are a homeowner looking at your options, or planning on buying a home in the future and are wondering what type of mortgage rate is best for you, give me a call at (705) 333-4338 or get in touch with me here!