It is vital to know what type of mortgage works best for you when you’re looking to buy a home in Canada. Both fixed and variable rates mortgages offer distinct advantages and can be beneficial based on the market conditions, your unique needs, expert recommendations, etc. With a critical rate cut announced of 25 basis points, there is greater confidence in the home buyer market for entering at the right time.
A fixed rate mortgage offers interest rates that are consistent, with mortgage payments that aren’t fluctuating each month. Fixed rate mortgages also allow homeowners such as yourself to get fixed rates even during periods of interest rates rise environments. You can budget better and free from the fluctuations of the market.
When it comes to variable mortgage rates, the mortgage contract depends on the interest rate environment. Your monthly payments can fall or rise depending on the overall market conditions. It is important to understand fixed vs variable benefits and challenges, so that you can choose the right mortgage interest rate.
Use these parameters to choose between fixed and variable mortgages
You can focus on the following mortgage parameters to understand fixed mortgage rates and variable rates, and understand which type is best for you. You can benefit in rising interest rates markets when you’re in a fixed rate mortgage plan, while gaining in a low interest rate environment through a variable monthly payment solution.
Preference of set budget
The preference of a set budget is a key area of consideration when deciding between fixed and variable mortgages. You can decide a set monthly budget and cover any additional expenses based on a fixed interest rate mortgage. You can predict future payments for the rest of your mortgage term, so that you’re able to make payments with foresight.
For individuals that prefer variable payments per month, they can choose an ARM (adjustable rate mortgage) or VRM (variable rate mortgage), which will decide whether the payment changes based on the market rates. You can also predict to a certain extent what your pay-outs are going to be so that you’re able to prepare a variable budget.
Predictability of schedule
The greatest area of advantage that fixed mortgages offer Canadians is the predictability of the payment schedule. You’re able to prepare a comprehensive payment structure for your mortgage without worrying about sudden spikes or successive periods of high interest rates.
In environments of high interest rates, there may be a risk of a trigger rate wherein the interest rates can continue to rise and the mortgage payment entirely goes towards the interest. You can have a potential risk of negative amortization which may mean that you can owe more than the original mortgage amount.
Interest rate environment
In lower interest rate environments, you may pay higher for a fixed rate mortgage when compared to a variable rate mortgage. You may also not be able to exit a mortgage agreement without prepayment penalties, which can be associated with a fixed rate mortgage.
In terms of a variable rate mortgage, your initial cost of starting a mortgage may also be lower which can be attractive to some home buyers. You may also decide to benefit from a low interest rate environment and lower your monthly payments towards your mortgage.
Best offered rate
Not only is it vital to select between fixed and variable rates, you should also focus on getting the right rate from the right lender. You may get a better variable rate from another lender who has expertise in your specific mortgage type or solution.
You should also consider that fixed rate mortgages have been more expensive over a longer period than variable rates. You can choose a variable rate or an ARM if you think that rate cuts will be announced which can influence the overall homeownership market.
Hybrid solutions
You can also choose hybrid solutions which offer greater flexibility in terms of fixed and variable structure. While housing prices have risen over the last few years, it is important to have a flexible approach to paying your mortgage.
Hybrid mortgages can help with the unpredictability factor, which can help home buyers shield themselves in higher interest rate environments to some extent. You can also gain some structure in your fixed term by understanding what payments are going towards the mortgage and how much you’re able to save.
Associated fees
You may have to factor in the mortgage prepayment fees, which could be the interest rate differential (IRD) or 3 months interest, whichever is higher. Your lender will have to make up for the lost revenue through the fixed mortgage payments when breaking it.
You should calculate any potential fees that may be attached to the mortgage solution, which can help you decide what type of mortgage you need to opt for. You can also choose a shorter term mortgage and renew after the term ends.
Should I opt for variable rate mortgage if I want a lower rate?
There may be key uncertainties associated with variable rate mortgages, which is why there isn’t a fixed guarantee that variable rate mortgages are better than fixed. You may also have to pay a premium for the variable rate, in terms of your overall monthly mortgage payments.
There may also be periods of higher uncertainty and a general high interest rate environment, which can lead to ultimately higher payments for your mortgage. However, you can still opt for more hybrid solutions that can provide fixed + variable solution for you.
Are fixed rate mortgages always safer for first-time borrowers?
In many cases a fixed rate mortgage will be the ideal choice when choosing between variable vs fixed mortgage. You can also choose a hybrid model when selecting the right mortgage solution, which can give you a balance of structure and flexibility. You can potentially secure a high property value home by also focusing on a larger down payment for a better rate.
It is also important to focus on other factors, such as credit score, lender type, broker expertise, etc. You can even opt for an open mortgage, if you choose to make payments faster than the schedule of your mortgage structure. In terms of first time home buying, it is generally safer to opt for a fixed mortgage from the right lender via a broker.