Things to consider when looking at a Fixed vs. Variable Mortgage
One of the most common questions I hear as a Broker is “Should I choose a Fixed Rate Mortgage or Variable Rate Mortgage?” – while there is no one standard answer there are several factors that can help determine which one is right for you. First, it is important to understand there are advantages and disadvantages to choosing either. Variable mortgages have historically resulted in homeowners paying lower rates but because they are tied directly to the Bank of Canada rate (which is announced and potentially changed 8 times a year), they are vulnerable to fluctuations which can drive rates down and save you money or drive rates ups and affect how much of your payments are going towards your principal amount owing. Fixed rates may be higher than variable rates but they are consistent for the term of the mortgage – they are not subject to fluctuations caused by changing interest rates. Fixed rates are normally recommended for first time home buyers so they can more easily manage their household budgets and mortgage payments without worry. Before deciding which option is better for you ask yourself a few important questions and always talk to a mortgage professional to evaluate your unique situation and mortgage needs before making a commitment.
Can I afford the risks that come with a Variable Rate Mortgage?
Because there is some risk associated with variable rate mortgages you must be able to mitigate the risk if rates do rise and handle any budgetary changes required. One method of protecting yourself involves setting your payment to a fixed amount that's higher than the minimum requirement. To do this many mortgage companies recommend setting your payments up based on the current five year fixed rate will allow you to provide a buffer in the event that rates rise and as an added benefit because you're paying more than the minimum amount you will also be paying more of your principal. Another way to protect yourself from increasing rates is to choose a 35 year amortization but pay the 25 year amortization-sized payment. If the rates increase you can go down to the lower 35 year amortization payment until rates decrease again.
Do I have a large down payment (in excess of 20%) or significant home equity?
If you are not a first time home buyer and have significant home equity or if you are able to make a large down payment you can hedge against some of the risks that may come with a Variable Rate Mortgage.
Does a variable rate mortgage fit my risk profile and comfort?
If you're the type of person that likes or needs stability and consistency then a variable rate mortgage may not be the best option for you. Before choosing a variable rate mortgage you must determine if it fits with your personality, lifestyle, income, need for security, and your family’s ability to absorb risk without having any negative impacts. If you are going to worrying about what is happening with your next payment every month or stress about possible increases to your amortization and lose sleep then a fixed rate mortgage is probably the better option.
Are there different types or options for variable rate mortgages?
If you are considering a variable rate mortgage then there are a few factors you need to explore with your mortgage broker or lender:
1. Payment frequency - Make sure you are aware of the options available before deciding. Some lenders may not allow certain variations of payment frequency (i.e. accelerated bi-weekly or weekly payments).
2. Rate changes - Some lenders change their variable rates in line with the Bank of Canada (eight times per year) while others adjust them quarterly.
3. Conversion to fixed rate - Does the lender allow the mortgage to be converted to a fixed rate mortgage at any time? If yes, what rate are you guaranteed on conversion – the best-discounted rate or the posted rate?
For more information on this subject and to see a list of the current fixed and variable mortgage rates in Canada please visit www.larryarnason.com/rates
There are many benefits for choosing either a fixed or variable rate so it is important to explore all of your options and seek the advice of your mortgage broker before making a final decision to determine what is best for you and your long term financial goals.