Variable vs Fixed Rate Mortgages
When thinking about a mortgage, the word 'rate' often comes to mind.
You likely know that interest rates affect your overall cost of borrowing, but do you understand the difference between a 'variable' rate and a 'fixed' rate?
Variable Vs. Fixed Rate Mortgage Overview
There are a few main factors that may affect how much you pay per month for your mortgage including your amortization period, down payment, overall terms, and what type of rate you choose.
The rate you settle on often has a large impact on what portion of your mortgage payments go towards interest and what portion goes towards paying down your principal balance.
Two very common types of interest rates to choose from are 'fixed' rates and 'variable' rates.
"Break It Down For Me, What Exactly Is A ‘Rate’?"
Whether you’re a First Time Home Buyer or you already own a home, it’s likely you secured a mortgage through a traditional 'A' lender, an (alternative) B-lender, or even a private lender.
When you secure a mortgage, your lender charges interest on your loan in order to cover their costs and leverage their risk of lending.
The interest rates that lenders charge are influenced by the financial markets and economy which is why it’s important to make sound decisions over what type of rate you choose.
Let's take a look at two common types of rates below!
The 411 Of Variable Rates
A variable rate (or 'floating rate') will fluctuate during the term of a mortgage.
Variable rates are influenced by lender prime rates, which are influenced by the Bank of Canada's policy rate (benchmark rate).
The 411 Of Fixed Rates
A fixed rate is a set rate that will stay the same until the term of your mortgage matures (your renewal).
Fixed rates are very strongly linked to the bond market.
The Prime Lending Rate
The fashion in which rates are set is a complex process. There are many factors which influence whether to raise or lower interest rates.
When deciding on their policy rate, the Bank of Canada will assess such factors as:
- Employment rates
- Manufacturing, export and other economic productivity
- Environmental catastrophes
- War
- Anything else that has the ability to impact inflation.
- Manufacturing, export and other economic productivity
Big Decisions? Should You Go Fixed, Or Variable?
There isn’t ‘one’ easy solution to this, otherwise everybody would be choosing the same option.
The decision to choose a variable rate vs. a fixed rate for your mortgage is subjective. Some borrowers prefer what is often deemed the ‘less-risky’ route by securing a fixed rate mortgage, while others enjoy knowing there’s a chance their rate may drop with a variable mortgage.
There are benefits and considerations of both types of rates!
Comparing Apples To Oranges
Because fixed rates differ so significantly from variable rates, it's beneficial to have an in-depth understanding over potential benefits and considerations of each one.
- Variable Rate Benefits
- -variable rates are often offered at a lower initial rate (because they are the higher risk alternative)
- -if interest rates drop, so does the amount you contribute towards interest!
- Variable Rate Considerations
- -if the benchmark rate is increased by the Bank of Canada, it's likely that you'll experience paying more towards interest and less towards your principal balance
- -inflation is likely to increase variable rates
- Fixed Rate Benefits
- -budgeting is easier as payments often remain fixed
- -inflation doesn't affect your payments during your mortgage term
- Fixed Rate Considerations
- -often offered at a higher rate (is a lower risk alternative)
- -borrowers may face larger penalties for refinancing their mortgage
Chatting with a licensed mortgage broker is a beneficial avenue for better understanding your mortgage needs!
Need Help Deciding Between A Fixed Rate or Variable Rate?
You've come to the right place!
I'm Kyle Benzies (licensed mortgage broker) and I'd be happy to share my expertise regarding fixed and variable rates.
I've helped countless clients make informed decisions regarding whether a variable rate or fixed rates compliments their unique borrowing situation the most. I pride myself in my ability to clearly explain options so that may clients understand every piece of their mortgage journey.
For a confidential chat regarding your mortgage goals, feel free to give me a no-risk call!
***other conditions may apply to anything listed above. The information provided on this page should NOT be implicitly relied upon, and may not be 100% up to date. It's best to contact us for the most current conditions/program offerings for first time buyers***