There are many questions you need to ask yourself when planning on buying a new home or renewing your mortgage. One of the first questions that you may be asking yourself is, “What is the difference between a variable rate mortgage and a fixed rate mortgage?”
What is a Fixed Rate Mortgage?
The interest rate on a fixed-rate mortgage is set for a pre-determined term – usually between 6 months to 10 years. This offers the security of knowing what you will be paying for the term selected.
Fixed Rate Mortgage Benefits:
- Rate is guaranteed throughout your term
- Peace of mind knowing your payments will not change
- Typically fixed rate terms are portable
Fixed Rate Mortgage Drawbacks:
- Can have a higher penalty (Interest Rate Differential or 3 months interest, whichever is greater)
- Historically are a higher rate than a Variable rate
Going the fixed rate route is often popular for first time home buyers, clients who are rate sensitive and risk adverse and clients who like to stick to a monthly budget and don’t like their payments to fluctuate.
What is a Variable Rate Mortgage?
A mortgage in which payments will fluctuate month to month depending on prime. If interest rates go down, more of the payment goes towards reducing the principal; if rates go up, a larger portion of the monthly payment goes towards covering the interest.
Variable Rate Mortgage Benefits:
- Historically a lower rate than fixed
- You are able to capitalize on a low prime rate
- Lower penalties if you break before the end of your term (typically a 3 months interest penalty)
Variable Rate Mortgage Drawbacks:
- Rate and payments can fluctuate during your term
- Some variable mortgage rates aren’t portable (transferring a mortgage from one property to another if you sell the home within your mortgage term)
Variable Rate Mortgages are popular with clients who can handle small amounts of risk and want to be aggressive when maximizing their savings on their mortgage term. These clients typically have a budget that can afford a higher payment if the rate increases. Variable Rate Mortgages also work well for people that need to break their mortgage before the end of their term.
When it comes to variable vs fixed, our Mortgage Specialists can help you determine which mortgage option is best for you.