You’ve decided you want to move this year, so what’s next? Do you want a condo or a bungalow? Are you done with city life and yearn for quiet country living? When you’re ready to make your next purchase there are many choices and decisions to make. Not the least of which is whether you want a fixed or variable mortgage rate. Although this part of the journey is not as exciting and glamorous as looking at new homes, it is part of the process. Deciding between the two mortgage rate options really depends on your financial circumstances. Let’s take a look at each.
Option 1: Fixed Mortgage Rates
The majority of Canadians have opted for a fixed mortgage rate. What that means is that you lock in the interest rate charged on your loan, for the duration of the loan term. The term of the loan could be 3-year, 5-year or 10-years. So let’s say interest rates go up after you’ve purchased your new home because you picked a fixed mortgage rate, you would only pay the amount you initially agreed to with your lender until it’s renewal date. It wouldn’t matter if interest rates go up or not during your term, your monthly mortgage payment, and the amount that goes towards the principle would all stay the same as outlined in your original agreement. Mind you, the same would hold true if interest rates went down, only now you’d be paying more than the person who is in a variable mortgage rate.
Option 2: Variable Mortgage Rates
Not that long ago, variable rate mortgages were the popular ones and lenders were offering deep discounts. However, once they started to see their profits were suffering, they abruptly slashed the variable discounts. Variable rates tend to be riskier as they fluctuate – as often as every month – based on the Prime lending rate. What this means for you is how much of your mortgage payment actually goes toward paying down your mortgage and how much of it goes to interest. People tend to use this option when interest rates are low and expected to go even lower. However, when the banks Prime lending rate goes up, your variable mortgage rate will too, which means higher monthly mortgage payments that you may or may not be prepared for at the time. Since your variable mortgage rate will be determined by the Prime rate, if you hold this kind of mortgage you will be hit with higher mortgage rates if it goes up, and it’s tough to know what will happen 6 months down the road.
Can I Change Options?
It’s worth noting that both fixed and variable mortgages offer their own advantages and disadvantages. It really comes down to how much risk you are prepared to take. If your loan is locked into a variable mortgage rate and you don’t like all the ups and downs, you can switch over to a fixed mortgage rate. However, the best time to switch is when interest rates are starting to rise. It’s not a good idea to wait too long to switch as you simply can’t predict what the interest rates will do. If you’re like most Canadians, you prefer the peace of mind when it comes to your finances and the choice might be an easy one, though it’s important to know the differences in options and what is available to you to take advantage of.
Being aware of the current market is very important when it comes to choosing the type of mortgage that works best for you. As an experienced mortgage broker, I work closely with you to help you through each step of the process so you feel confident, knowledgeable and secure in your decisions. You can rest easy knowing that I am here to help you, and will guide you to the best solution for your situation while also getting all the paperwork in order so that it makes clear sense. Whether you’re looking for a first time mortgage or you’re shopping around to renew, contact me, Darren Robinson at 705-315-0515. I love what I do & I can’t wait to help you.