Variable vs. Fixed Rate Mortgage

December 12, 2016

Variable vs. Fixed Rate Mortgage – Which should you choose?

 

Professional advice from your Trusted Mortgage Knowledge Professional.

What is a fixed rate mortgage?

 

Fixed Rate MortgageA fixed rate mortgage is usually set over a term of 1, 3, 5 or 10 years. During the length of the term, the rate you first sign with will be the rate you pay throughout the entirety of the mortgage. In other words, there will be no surprises along the way. You will have a permanent rate with a payment that won’t fluctuate.

Normally, the fixed rate is higher than the variable rate, with very few exceptions. In Canada, the fixed rate itself is determined by Canada Bond yields. These yields are driven by economic factors such as unemployment and inflation.

 

What is a variable rate mortgage?

 

A variable rate mortgage is also set over a term of 1, 3, 5, or 10 years; however, it is priced at a lower rate. Why? Because if you decide to sign on for a variable rate mortgage, you are taking on more risk.

Unlike fixed rates, variable rates can change over the term of your mortgage. While this change may be a decrease in rate, it could also be an increase. Variable rate mortgages are also driven by economic factors. But in this instance, your rate isn’t secured. Rather, variable rate mortgages are driven by the prime rate. It is common for the Bank of Canada to reduce rates when the Canadian economy needs stimulus. On the other hand, they will raise the rates when the Canadian economy is thriving as a way to control inflation.

In a perfect world, we would be able to know ahead of time if the variable rates will increase, decrease or stay the same. But unfortunately, this isn’t the case. So now you must ask yourself:

“If the rates increase, will I still be able to afford to pay off my mortgage every month?”

 

When it comes to mortgages, there is no one-size-fits-all solution. One mortgage rate may look very attractive at the moment, but if you’re unsure how to navigate through all the possibilities, be sure to talk to a Trusted Mortgage Knowledge Professional. Contact Milka Lukacevic of The Mortgage Centre TMK Team, your local Tri-Cities Mortgage Broker.