Fixed vs Variable or Adjustable Rate
What exactly is the difference between Fixed and Variable mortgage rates? What is the best option for you?
If you choose a fixed mortgage rate, this means that your rate and payment is set at the date of closing and will remain the same throughout the term of your mortgage. For example, if the current fixed rate is 2.4%, you will be paying that percentage of interest on your mortgage until it is up for renewal, at which time you will either negotiate a new rate with your existing lender or switch to a new lender who may be offering a lower rate at that time.
Variable or Adjustable-Rate
If you decide to go with a variable or adjustable rate, your rate will fluctuate throughout the term of your mortgage. Typically, the rate you pay will change according to the prime rate set by the Bank of Canada, plus or minus a premium or discount offered by the lender.
Let’s look at an example of this. If your rate is prime -0.5%, and the current prime rate is 2.5%, this means you will be paying 2% interest on your mortgage. If during your term, the prime rate goes down to 2%, your mortgage will, in turn, reduce to 1.5% interest. Make sense?
Variable and Adjustable are often used interchangeably as they both fluctuate however there IS a difference. In a Variable Rate, your mortgage payment will remain the same even if the rate adjusts unless the rates increase so much that the payment does not cover the interest. What does change is the amount of your payment goes towards your principal vs interest.
In an Adjustable-rate on the other hand, your payment will fluctuate alongside any rate changes to ensure the same amount continues to be applied towards your principal. The latter will keep your mortgage payout date the same and the prior will change your scheduled payout date either earlier or later depending on if the rate had gone up or down. If choosing a fluctuating rate product you will want to confirm how your lender passes the rate change on to you, the borrower.
How do I know what rate is best for me?
Now that you understand the differences between a fixed or fluctuating rate, how do you decide which option is best for you? A strong majority of mortgage holders in Canada chose a fixed rate, however, there are also many who choose the alternative. Historically, a variable-rate mortgage has proven to provide borrowers with lower rates on average but they do come with more risk.
There are a few things to consider when choosing a rate, like asking yourself these questions:
- How much can I afford to pay right now?
- If I were to choose a variable rate, will I still be able to afford my payments if the rate increases?
- Do I prefer stability or am I ok with a bit of a gamble to potentially pay less interest?
- What direction are interest rates expected to go?
- Is this my forever home? What penalties do I incur if I sell early?
It is my job as a mortgage broker to offer free guidance and advice for my clients when it comes to choices like this. Feel free to contact me with any questions, or for a no-obligation consultation. I would love to help you in any way that I can.
Do Fixed and variable mortgage options have different early payout penalties?
The short answer, yes!
Early payout penalties or prepayment penalties are fees that your lender charges if you break your mortgage contract, pay more than allowed towards your mortgage or transfer or pay back your entire mortgage before the end of your term. The amount you are required to pay will depend on the type of loan you hold, your lender, and the rates.
If you have a variable or adjustable-rate mortgage, the penalty is generally limited to three months of interest. However, if you have a standard five year fixed rate mortgage (like two-thirds of Canadian mortgage holders), you will most likely be required to pay the greater of either three months interest or interest rate differential (IRD).
What are the current rates?
The rates for mortgages not only fluctuate regularly but are also based on many different variables and options, which is why I created an interactive video to guide you along the process. Come join me as I walk you through a ’choose your path’ experience to learn more about what rates and promotions are available to you.
Watch Interactive Rate Video: HERE
Ready to move forward? Have questions? Contact me today for a free no-obligation consultation.