Condo or freestanding home? City life or quiet country living? Two story or bungalow? When looking to make your next move and purchase a new home, there are certainly quite a few choices and decisions to be made. One key decision that you’ll need to make is the choice between a fixed rate and a variable rate mortgage. Although both types of mortgages have certain advantages, choosing between the two really depends on your financial needs and circumstances. Here’s what you need to know so that you can make the best choice.
Fixed Rate Mortgages
As the name implies, a fixed rate mortgage is a mortgage in which the interest rate attached to your loan remains the same throughout the entire term of the loan. Opting for a fixed rate mortgage means that homeowners will not have to contend with or worry about any risk associated with fluctuating interest rates. A fixed rate mortgage also makes budgeting an easier task, as you always know how much your mortgage payments will be.
While fixed mortgages do provide a sense of security, stability and comfort, they don’t allow you to take advantage of low interest rates if they come up during your mortgage term.
Variable Rate Mortgages
A variable rate mortgage can be thought of as the opposite of a fixed rate mortgage. Instead of locking in at a specific interest rate, the interest rate attached to a variable mortgage is based on current market conditions and is calculated based on the prime interest rate. This means that as interest rates decrease or increase, your interest rate will also fluctuate accordingly.
Typically, variable rate mortgages offer lower rates than fixed rate mortgages because you are giving up some of the security and comfort that comes with a fixed rate mortgage. If rates stay low, they also allow individuals to pay more towards their loan principal. However, when interest rates increase, so do your mortgage payments, which can be tough to manage if you are on a fixed income.
How to Choose
Both fixed and variable mortgages offer advantages. The choice really comes down to how much risk you can handle and whether you would benefit from the stability of knowing exactly how much your mortgage payment will be each month.
Being aware of current market conditions is very important when it comes to choosing the type of mortgage that is best for you. With interest rates on the rise, it may make sense to opt for a fixed rate mortgage to avoid any future surprises. However, as a noted in a recent article, it’s important to not let fear make your decisions for you. Prime lending rates in Canada tend to be lower than the interest rates offered through a fixed rate, so if you are able to handle a little fluctuation, it may still make sense to go with the variable option, save money in interest payments, and pay down the principal of your loan more quickly.
Still not sure which option best suits your needs? Don’t worry – it can be a confusing choice to make. As an experienced and professional mortgage broker in Barrie, I can help you determine whether a fixed rate or a variable rate mortgage is best. I am also here to help you find the best rate. Call me today at 705-315-0516 to set up an appointment and explore your mortgage options.