One of the toughest decisions you’ll have to make aside from choosing the right home and finding the best community to live in is deciding between a fixed or variable rate mortgage.
If you ask around for opinions, you may find that everyone has a different idea of what the best mortgage is. While there’s no right or wrong answer, I will advise that everyone is different. As a home buyer, you need to make the right decision for your circumstance.
In this article we will compare the pros and cons of Fixed vs Variable Mortgages, so you can make an informed choice when it comes time to buy a home. Also be sure to check out this article on 20 Mortgage Questions You Need to Ask!
Fixed Rate Mortgage Definition
A fixed rate mortgage is loan where the interest rate remains the same over the term of the loan. This means that over the term of the mortgage, payments remain the same and the amount of interest payed remains the same. This predictability can provide stability to households that are on fixed budgets.
According to many studies, most Canadians feel that going with a fixed mortgage rate is the best way to go. This is especially true with younger first time home buyers and newcomers to Canada who are affected more by home buying costs.
Fixed Rate Mortgage Advantages
- Interest rates are fixed over the course of the loan.
- Fixed Rate Mortgages provide predictability – home owners know exactly how much they need to pay over the course of the loan.
- If interest rates increase you don’t have to worry as you’re locked in at your fixed rate for the term of the mortgage.
- Mortgages with a fixed rate are a good option for those who think interest rates will go up in the future.
- You can set it and forget it! Since the mortgage terms are locked in, you can have peace of mind that your payments will remain the same.
Disadvantages of a Fixed Rate Mortgage
- Fixed Rate Mortgages have higher interest rates than variable rate mortgages.
- A Fixed Rate Mortgage tends to be less flexible.
- If interest rates fall during the term of your mortgage, you will pay a higher interest rate. and less towards the balance of your mortgage.
- You pay a premium for the stability of a locked in rate.
Variable Rate Mortgage Definition
A variable interest rate mortgage is a home loan where the interest rate will fluctuate with market rates throughout the term of your mortgage. Every time interest rates change, the amount of your payment that goes towards the principle of the mortgage will change also.
It’s important to note that variable rate mortgages can work in different ways. The first type of variable mortgage is structured so your payment rises when interest rates rise. This is sometimes called an adjustable mortgage.
A second type of variable mortgage is one where your monthly mortgage payment stays the same but the amount of payment that goes to principle will change depending on the rate. Always review the terms with your lender before committing to a variable mortgage.
In my experience, variable rate mortgages are popular with home owners who have more equity and lower debt levels. They’re able to take advantage of a lower interest rate, while at the same time better equipped to handle any possible rise interest rates.
Advantages Variable Rate Mortgage
- Many home owners have saved thousands of dollars in interest by choosing a lower variable rate mortgage.
- When interest rates are low or are trending downward, a variable rate is a good option.
- If you’re financially able to handle a rise in interest rates, you have the possibility to save a lot of money and pay off your debt faster.
- Many lenders offer the ability to convert your variable mortgage to a fixed rate mortgage.
Disadvantages of a Variable Rate Mortgage
- Financial uncertainty – a rise in interest rates will mean you are paying less towards your principle. If interest rates rise fast enough it can cause financial hardship for some home owners
- You need to pay close attention to interest rates to make sure your mortgage is helping you achieve your goals.
- There can be costs associated with converting your mortgage to a fixed rate. Make sure to review the terms with your lender so you understand.
- If money is tight and you rely on having the stability of a fixed payment, a variable mortgage might not be the right choice for you.
Fixed Rate Mortgage Versus Variable Rate Mortgage – Which One is Right For You?
Now that we have briefly gone over the pros and cons of each type of mortgage, the final step is to determine whether a fixed or variable mortgage is right for you. The easiest way to do this is the answer a few simple questions.
- Are you comfortable with the possibility that interest rates will go up during the term of your mortgage?
- If interest rates were to go up 2%, can you afford it? For example, on a $500,000 mortgage, your payments could be another $500 or more a month on a 25 year mortgage.
- Are you willing to be actively involved and monitor interest rates?
- Are you ok balancing the risk of rates rising versus the lower rate you’ll get with a variable mortgage?
If you answer yes to all of these questions, then a variable mortgage may be a good option for you. If you answer no to any of these questions, then you might want to stick with the safety of a fixed rate mortgage.
To sum it up, everyone needs to make a decision that’s right for their situation. There’s no right or wrong answer so my advice is to choose a mortgage that works with your lifestyle.
