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FAQs About Variable & Fixed-Rate Mortgages

FAQs About Variable & Fixed-Rate Mortgages


As a certified mortgage broker, I work closely with my clients to help them find a mortgage solution that suits them best. Especially for first time home buyers, there are naturally a lot of questions about interest rates, down payment options, government incentive programs, and so on. Another critical consideration for home buyers however, is how to choose between a variable and fixed-rate mortgage. Here are a few frequently asked questions about fixed and variable mortgages, with answers that will help you get closer to making the right choice for you:

Q: What is a fixed-rate mortgage?

A:  A fixed-rate mortgage is a mortgage loan that has an interest rate that does not change during the term of the loan. Your interest rate (and payments) will not change for as long as your contract is in place.

Q: What is the benefit of a fixed-rate mortgage?

A: Fixed-rate mortgages are great for anyone who likes consistency, and/or doesn’t want to worry about what’s happening with interest rates and financial markets. If rates go up, homeowners can have the peace of mind knowing that their monthly payments will not change during their mortgage term (typically 6 months to 5 years) and they can budget accordingly.

Q: What’s the downside to a fixed-rate mortgage?

A: If, during your mortgage term, interest rates are lowered by your bank or lender, you won’t be able to take advantage of that or enjoy those savings. You are locked into the interest rate you agreed to. If you want to break your mortgage and sign on for a new, lower rate, you’ll have to pay a penalty, which can be quite substantial. In some cases, it may be worth it to pay the penalty if a much lower rate is offered, but every scenario is different – be sure to do your homework and get sound financial advice first.

Q: What is a variable rate mortgage?

A: As the name suggests, a variable rate mortgage means that the interest rate is fluid; it can go up or down based on current market conditions (determined by the prime interest rate set by your lender). Your payments either stay the same (but the amount you pay on the interest compared to the principal loan will vary), or the entire mortgage payment will fluctuate with changes in the prime rate.

Q: What is the benefit of a variable rate mortgage?

A: A variable rate mortgage usually has a lower interest rate. When rates stay low, the advantage is that you pay more money down on your principal each payment (or make lower monthly mortgage payments), which is a great way to save money while tackling that big loan.

Q: So, what’s the downside of a variable rate?

A: Firstly, a variable rate mortgage means you give up the security of a fixed, stable rate. Secondly, when interest rates increase, so do your interest payments. This could prove to be a financial hardship for some families, or it could mean that it will take more time to pay off your mortgage principal.

Q: How do I choose which one is best?

A: It’s hard to predict what will happen with interest rates. The Bank of Canada has kept interest rates low for some time now, but as everyone knows, they won’t stay the same forever. While having some knowledge about prime rates and market conditions can help you make your decision, the choice boils down to you and your comfort with taking financial risks. If you know you prefer the security of a fixed-rate mortgage, then that’s the one that’s best for you. Likewise, if you have a little wiggle room to try out a variable rate mortgage, you may be able to enjoy some extra savings. You can always lock into a fixed-rate mortgage down the road if or when the prime borrowing rate goes up.

If you still have questions about which mortgage is best for you, talk to me. As an experienced, accredited mortgage broker, I’m here to help you find a solution that’s best for you and your unique needs. Connect today at 705-315-0516; let’s set up an appointment and I can answer all your mortgage questions!

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