The differences between a variable vs fixed-rate mortgage are important when considering a loan. Whether you are buying, refinancing, or doing a debt consolidation, understanding the differences between the two can help save you money and meet your financial goals.
• A Variable rate mortgage is where the mortgage payment is based on a benchmark. Any change thus affects your mortgage payment. It can increase or decrease however typically doesn’t fluctuate more than 0.25%. The Bank of Canada meets 8 times per year and that is when they decide whether prime rate shall make a change. All of my clients are made aware of these changes and whether they should maintain their current position or change.
• A fixed-rate mortgage is where your interest rate is set and stays the same for the entire term of the loan.
• A variable-rate benefits borrowers in a declining interest rate market. When the Bank of Canada prime lending rate drops, so does your mortgage payment. If the Bank of Canada raises the prime lending rate, your mortgage payment will increase.
• If the fluctuating mortgage payment affects your sleep, always worrying whether there will be a change, it may not be the right mortgage product for you.
Which is Better: Variable or Fixed Rate Mortgage?
The simple answer is always, what are you most comfortable with? Studies have shown that over time, a borrower is likely to pay less interest overall with a variable rate mortgage versus a fixed-rate loan. Historical trends aren’t necessarily indicative of future performance.
The borrower must also consider the amortization period, the longer the amortization, the greater a change in interest rates will have on your payments. Therefore, a Variable rate mortgage is beneficial in a decreasing interest rate environment. When interest rates rise, so do your mortgage payments. You must be in a financial position to handle the change in payments.
Another benefit of the variable rate mortgage is that if your plans are to sell your home before your term is up, our penalty to get out is only 3 months interest payments. If you are in a fixed
rate mortgage, your penalty is either the Interest Rate Differential (IRD) or 3 months interest, whichever is higher.
This is something to consider as it would affect the bottom line you could pull from a sale. The lender choice also makes a significant impact on the payout penalties as the big banks
change their penalty based on the posted rate rather than a contract rate. This could be the difference of 13,000 with a major bank to $3500 with a monoline lender.
If you need professional mortgage advice, speak to our trusted Edmonton Mortgage Broker Eva Neufeld. She will sit down and set out a plan not only for the short term but ensure it meets
your long term financial goals.