Fixed of Variable?
With rates on the rise, which option is best for you? Should you stick wth the stability of a fixed mortgage rate or roll the dice with a variable? It’s one of the most difficult decisions faced by new home buyers and homeowners who are renewing or refinancing. With fixed rates steadily increasing and the Bank of Canada indicating that they are not finished raising rates, the question is more timely than ever. Let’s take a look at the options and weigh the pros and cons.
Fixed Rate
Many Canadian borrowers opt for the stability of a fixed rate. And in most cases, the 5-year fixed is the term of choice. This is because it locks your rate for the duration of the term, giving you the peace of mind that your monthly mortgage payments are going to remain the same. Thanks to the high demand of the 5-yr term, lenders are generally able to offer competitive rates, making them great value from a risk-assessment perspective. Plus, you don’t have to worry about your mortgage renewal for 5 years.
The downside is that rate stability and peace of mind may come at a cost, at least in comparison to lower-priced variable rates.* Another big downside is the prepayment penalty on a fixed term mortgage. If your life plans change inside your 5-yr term, you may pay a hefty penalty to break a fixed mortgage contract.
Variable Rate
For those looking strictly for the lowest rates currently available, chances are that is going to be a variable rate*. A variable rate mortgage is one where the interest rate fluctuates with the prime rate, which is set by the Bank of Canada’s key lending rate decisions eight times per year.
Aside from competitive rates, variable mortgages are very attractive for those who think they may need to break their contract before the term is up, since variables charge a prepayment penalty of just three months interest. Variable rates do have a degree of risk however, since your interest rate can suddenly rise (or fall) depending on a host of economic, inflationary, and geopolitical factors. When the rate increases, so to will your monthly mortgage payment.
If you’re not crazy about the idea of your monthly payments potentially changing over the course of your term, there are certain lenders that offer fixed-payment variable rates. In those cases, your monthly payment remains the same while the amount paying down your principal vs interest will fluctuate.
But There is Another Option
Another option is the “multiple product” mortgage, which allows a fixed rate and a variable rate (and/or potentially a home equity line of credit too).
This provides you with the best of both worlds – the stability of a fixed rate, but also the potential rate savings of a lower variable rate. A multiple product mortgage is a great option for anyone having a hard time choosing between the two, and a great way to hedge your future rate expectation bets. While only 1 in 17 opt for a multi-mortgage, it’s worth considering given today’s uncertain rate outlook. Choosing the right mortgage can be daunting … but the good news is you don’t have to make the decision alone.
Give me or your favourite mortgage broker a call to help you find your best solution.
*As of this writing, subject to change without notice.
Candace Perko, Mortgage Broker
