Finding a mortgage is all about securing the best rate. Right? Well, not entirely…
Sure, interest rates are a major factor when it comes to choosing a mortgage, but there are other things to consider, such as:
Are you comfortable with risk?
Do you plan on moving or is this your “forever home?”
Does your family rely on a stable budget?
Once you’ve taken these details into account, you’ll be better equipped to weight your options, and how to decide which type of mortgage fits you best.
Variable mortgage rates
Variable mortgage rates fluctuate depending on the mortgage lender’s prime rate – prime is the standard interest rate set by major banks on short-term loans. If the prime rate remains stable, so will your variable mortgage rate. BUT, if prime rates go up…you guessed it, up goes your mortgage rate along with your payment.
And because there’s lingering uncertainty around variable mortgage rates, they carry a higher risk level.
Bank of Canada’s prime rates have increased three times since April 2017.
So, why should you consider a variable rate mortgage?
- You can take advantage of savings from the outset. Typically, variable mortgages carry a lower interest rate than fixed mortgages. The win - a lower monthly payment. This will continue as long as the variable rate remains steady. However, if variable rates start to go up, your payment will increase. And, if you stick it out for the full term, you won’t know if you came out on top until you can average out all of your payments.
- Cheaper penalties if you have to break your mortgage. If you decide you want to sell or refinance your mortgage mid-term, it’ll cost you only three months’ interest. Break a fixed mortgage; you’re looking at paying the greater of three months’ interest or an “interest rate differential” (IRD), which can be costly.
- You’re financially okay with risk. Talk to a trusted advisor and decide how mortgage rate increases might affect your financial health. Can you afford a mortgage payment increase? Be sure to assess income, employment stability, and your savings strategy.
TIP: If you go with a variable rate, settle on a monthly payment that exceeds the minimum. This will lessen the impact of rate changes on your household budget, and give you the chance to pay down your principal faster.
Now, let’s look at fixed rate mortgages
Fixed rate mortgages allow you to lock in a rate for the term of the mortgage. The benefit of locking in is achieving a set mortgage payment for predictable budgeting.
With consistent interest rate hikes over the past year this seems to be the popular option for Canadian homebuyers.
Fixed rate mortgages are the most popular among Canadians.
Why should you get a fixed rate mortgage?
- Peace of mind. With a fixed rate mortgage there are no surprises. Just lock it in and make scheduled payments. Perfect for the more risk-averse buyer.
- You’re a first-time homebuyer. First-time homebuyers and young families benefit from predictable mortgage payments with a fixed rate. Younger buyers typically have less income to spend after budgeting and little room for increases. Settling on a level payment schedule works best for the budget conscious.
- Narrowing spread. As interest rates climb, the gap between variable and fixed mortgage costs is narrowing. This makes fixed rates and their inherent stability that much more attractive. Homebuyers can now find fixed rates on five-year mortgages as low as 3.25% so purchasing your financial peace of mind is not such a large investment.
TIP: Consider fixed rate mortgages to include a premium for protection on your payments, then determine how much that security is worth to you. Remember, it’s not uncommon to finance extended warranties on vehicles or pay annual fees on safeguards like alarm monitoring on homes, all for added protection against the unforeseen – this should be considered in the decision making process.
How do I know which type of mortgage is best for me?
In the end, what’s “better” comes down to your tolerance for risk, your current financial health, and the conditions in the mortgage market. What’s “best” is consulting your advisor to determine the specific products that suit your needs.
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