Should you choose a Fixed or Variable Mortgage Interest Rate?
by Mark Benkovic, Excel Mortgage Canada Connection, Saturday, October 14, 2017
One of the most common questions posed by mortgage borrowersi is “Should I choose a Fixed or Variable Mortgage Interest Rate?”
Variable (Adjustable) Rate Mortgage Basics:
For a variable rate mortgage both the interest rate and the periodic payment amount fluctuate up or down relative to the “Prime Rate”, which is set by the Bank of Canada 8 times per year. The Prime Rate as of October 5, 2017 is 3.2%.
Fixed rate Mortgage Basics.
Fixed interest rate mortgage terms vary between 6 months up to 10 years.
Since all mortgage lenders are in business to maximize profits, it pays to shop around because there are significant differences in rates, flexibility options and penalties between lenders. The obvious conflict of interest is that the mortgage borrower is looking for the most flexible options at the lowest rate, and vice versa.
Aside from the fixed versus variable debate when it comes to purchasing a home, which is usually the biggest decision in most people’s lives, there are other considerations:
- Over how many years will the mortgage be repaid (i.e. amortized)?
- Can the mortgage be transferred to another property if I move?
- What term should I chose for my current mortgage rate?
- What is the lender’s policy to convert a variable rate into a fixed rate mortgage?
- Is the mortgage “Open “or “Closed” and what is the early redemption penalty?
For perspective, consider the fact that mortgage interest rates have been at historical lows for almost seven years, but recently the Bank of Canada raised interest rates twice (July 12 & Sept 6,2017) by a total of half a per cent.
Every decision has serious future consequences and the best we can do is to use all the available information to make the most informed decision possible. In reality, nobody can predict the future, and choosing between a variable (adjustable) or fixed mortgage rate is a very emotional peace of mind kind of decision. To make the right informed decision for yourself you need to ask yourself these two questions:
(1) Do I expect interest rates to stay the same or go up or down going forward? And,
(2) Which of the two choices (fixed or variable) will give me the most peace of mind?
Changes to lending rules have made this decision more complex and confusing. There are many options and policies at different mortgage lenders. As a mortgage agent I can ease the stress of the mortgage decision making process by showing you what is in your best interest in terms of emotional and financial peace of mind.