Fixed vs. Variable
When searching for a mortgage, there can be a lot of information to process. Some products are more publicized or advertised as the better option, when in reality mortgages are FAR from one size fits all. To help make all the information coming your way easier to understand, below are the main differences between the Fixed and Variable rate options.
This type of mortgage will charge you a certain interest rate that will not change throughout the term of your mortgage. This is an excellent option for the risk averse, who would sleep much better at night knowing exactly what tomorrow will look like. Especially with what has been going on recently with the Bank of Canada’s policy changes and rate hikes, it’s not crazy to want to fix your payments. Something that 99% of lenders gloss over however, is that a prepayment penalty is approximately 4.5% of the balance, vs about 0.5% of the balance on variable. However, that is only a concern if you make the choice to cancel your fixed mortgage to switch to a variable mortgage, renew your mortgage earlier than planned, or want to move lenders part way through your term. Staying committed to your fixed agreement will avoid those penalties.
Math for prepayment penalties:
Fixed – Approx. 4.5% on a $300,000 balance = $14,000 penalty
Variable – Approx. 0.5% on a $300,000 balance = $1,500 penalty
Variable rate means just that, it is subject to change with the Bank of Canada’s rates. Variable rates are much lower than fixed rates (on average 0.75% lower) and for good reason, the lender is not protected like they are on a fixed. The Government of Canada has raised interest rates recently, almost always in 0.25% increments at a time (approx. $13/mo. per $100,000 of mortgage). When comparing options between fixed and variable, keep in mind that with a 0.75% difference the Bank of Canada would have to raise its rates more than 3 times for your rate to be higher than the current fixed rate. Another thing, variable terms are almost always convertible to fixed should you want to throughout the duration of your term. There are eight prescheduled Bank of Canada meetings per year on variables like the interest rate adjustments, so it definitely won’t blind side you overnight. This is a good option for those who are comfortable with changing rates, and are looking for a lower interest rate.
Simply put, would you like to have the comfort of knowing you are protected if rates go up but paying a little more now, or take a calculated risk and follow the Bank of Canada’s rates. Your guess is as good as mine as to where the Bank of Canada’s rates will be in 3-5 years, and there is something to be said about that. It’s all about having the conversation, and knowing what you are comfortable with. There are a lot of options out there; making sure you’ve discovered them all is key to making the right decision.
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