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Money Advice for Life
Fixed vs. variable: picking a mortgage that's right for you
Fixed or variable? When it comes to picking the type of mortgage rate you want, there are many things to consider.
There are many questions and decisions to make when buying a house. How much can I afford? Where do I want to be located? How much can I put down? Something you may not be considering though is the type of mortgage rate you want – a fixed rate mortgage or a variable rate mortgage. Understanding and picking the type of mortgage rate you want is a big decision, and without the proper knowledge and resources, can be quite difficult to make. When choosing the mortgage rate for you, it’s important to look at your situation and ask yourself what you are comfortable with. Like any big decision someone makes in their life, it often starts with a good old-fashioned pro’s and con’s list.
A fixed mortgage rate is one that remains the same throughout the entire term of your mortgage, no matter how much the market fluctuates. With a fixed rate, you’ll know exactly what you’re paying towards the principal and the interest on your mortgage.
Pro: Known as the ‘set it and forget it choice’, a fixed rate mortgage provides no risk if interest rates change and can provide a sense of security for people, especially if raising interest rates cause you stress.
Con: Fixed mortgage rates often are higher than variable mortgage rates and are locked-in, meaning if interest rates were to decrease, you wouldn’t be able to take advantage of the lower rates. They typically have higher payout penalties than variable mortgage rates if having to break a mortgage prior to the term being up.
A variable mortgage rate is one that fluctuates with the market interest rate, known as the ‘prime rate’. What this means is the amount of your mortgage payment that goes to the principal and towards interest can change month-to-month.
Pro: Generally, variable mortgage rates are lower and can result in interest savings and provide you with the option to pay your mortgage off faster. Variable mortgage rates also have a lower payout penalty (3 months interest) if the mortgage is broken prior to the term being up.
Con: Variable rates have a bit of risk associated with them, as they’re unpredictable due to fluctuating markets. If interest rates increase, the amount you pay towards interest will also increase.
When people hear the term variable, many believe this means that your payment fluctuates. What many don’t know is that when choosing a variable rate you have the option to set your payment amount so it’s the same each time. What this means is that each payment date your payment amount stays the same, but depending on an increase or decrease in interest rates the portion of your payment that goes towards interest and to the principal may change. To learn more, talk to a mortgage specialist.
To help explain the difference between fixed and variable rates further, we recommend checking out this great Know How video by Ontario’s Northern Credit Union.
Your buying situation
There are many factors to consider when choosing between a fixed and variable rate. To help break it down, here are the three questions to ask yourself:
What is your risk tolerance?
What is your financial circumstance?
What are the chances of you breaking your mortgage before maturity?
Everyone’s risk tolerance is different and depends on your personal and financial situation. For some, a bit of risk may be scary, while for others they may be comfortable taking one. If you’re someone who lays awake at night worrying about increasing or changes to payments, choosing a variable rate may not be for you.
Your financial circumstance can have a large impact on determining if a fixed or variable rate is right for you. Do you live pay cheque to pay cheque or frequently spending above your means? If so, a fixed rate may be the better option for you. If interest rates increase causing your mortgage payment to increase does this cause you to worry? If you can handle an increase, a variable rate might be better suited for you.
Breaking your mortgage before maturity
Life happens and things change that may cause you to break your mortgage before your term is up. It’s important to understand when choosing a mortgage the rules around payout penalties – the fee you would pay if you were to break your mortgage before the term ends. Variable and fixed rates have different payout penalty rules and a mortgage specialist can help you to understand the penalty payout rules, but also calculate the payment.
Consider factoring in your personal situation and future goals to help pick a mortgage term length (one-year, three-years or five-years) based on your situation. Ask yourself:
What stage of life are you in?
Are you purchasing the house with anyone? (e.g. friend, sibling, etc.)
Is this home big enough to grow into?
Do I plan on relocating for work anytime soon?
With any decision, it is always important to do your research and speak with a mortgage specialist. They can provide you with guidance and advice based on your personal situation, help you to understand market trends and forecasts and assist you in making one of the most important decisions of your life.
To learn more, contact one of Conexus’ Mobile Mortgage Specialists today.