One of the first decisions mortgage buyers face is deciding between a fixed or variable-rate mortgage. It’s an important decision that can significantly affect your financial stability over the next few years, and the last thing you want is to make the wrong decision. Here are a few insights into the differences between the two and what it means for today’s economic environment.
What’s The Difference?
Fixed-rate mortgage payments do not change over the agreed term, whether it’s a one-year or ten-year. On the other hand, a variable rate mortgage relies on the prime lending rate to determine the payment owed. The variable-rate can either be above or below the prime-rate depending on your credit score. The rate can also be affected depending on your relationship with the lender. Although the prime rate may fluctuate, the agreed rate below or above prime will remain constant over the contract
The Pros and Cons
The fixed-rate (FR) mortgage provides the borrower with a set interest rate, and therefore the monthly payments are fixed. Individuals can enjoy the financial stability an FR offers because of its consistency, which makes budgeting simpler. Historically, FR is typically more expensive over time because they prove to be riskier for the lenders.
The variable-rate (VR) mortgage fluctuates with the prime rate or more commonly known as the interest rate. Although VRs tend to be cheaper, it is a riskier investment for the borrower because of the interest rate uncertainty. The interest rate continually fluctuates, and the possibility for it to increase is always a threat to your financial stability.
What Does This Mean In Today’s Economy?
The Bank of Canada (BoC) changes the interest rate depending on multiple factors but most crucially, unemployment, exports and inflation. People are mostly aware now that the interest rates are at an all-time low because of the BoC swift action to keep our economy in motion during this uncertain time. It’s unknown whether the BoC will increase or decrease the interest rate, but it’s appealing to sway towards an FR mortgage with these ideal rates. RateSpy founder Robert McLister said in the Globe and Mail “If you’re in the trenches shopping for a new mortgage, I’m going to tell you something I’ve rarely told anyone in 13 years in this business: Variable rates are a gamble that you don’t need to take.” He added, “There’s little question in my mind that you’ll win for at least a year or two by floating your mortgage rate. But year three is a crap-shoot. And years four and five entail legitimate risk of higher borrowing costs.”.
Consult your local mortgage specialist for more information regarding home financing. Any questions? Feel free to get in touch with us and we’d be happy to explain it all!