FIXED RATE VERSUS VARIABLE

The most common question is “fixed or variable – which is my best option?" This is an easy question but there is a lot to consider on the client’s behalf. The difference between a fixed and a variable rate is like trying to compare apples to oranges. They each serve a different function. A Variable Rate Mortgage is an interest rate that is “floating” and based on the prime rate of Canada. With historically low interest rates, the variable has been a popular product.

Why isn’t EVERYONE taking a Variable Rate Mortgage? Seems simple enough… the prime rate of Canada stays low, and my interest payments stay low as well. There’s no guarantee that we will stay at these “all time lows” in interest rates. However, the lenders have a “lock in” feature set up within this program that allows you to lock in to a Fixed Rate Mortgage at any time, without penalty. It is typical for the banks to reset your payments monthly under this product based on any changes on the prime rate. This way you never run into a shortfall on your mortgage payments. So, if the prime goes up payments are adjusted upward and if rates go down the payment will go down.

What about prepayment options and prepayment penalties? Usually you can find a bank that will allow prepayment options attached to their variable rate products. If you decide to set your payments to reflect a higher interest rate, the difference between the two payments goes directly to your principle each month. This can save you YEARS off the amortization of your mortgage and thousands of dollars in interest.

The question now is how the penalties differ between these two products? The prepayment penalty for a Variable Rate Mortgage (breaking the mortgage), is three –months interest whereas a Fixed Rate Mortgage (or commonly referred to as a “closed” mortgage), is set up so that you have “fixed “, payment that you know the amount of each and every month. The prepayment penalty on a Fixed Rate Mortgage is 3 month interest or IRD (interest rate differential) whichever is the greater.

The Fixed Rate Mortgage may be most attractive for the client who is looking for stability in their payments and piece of mind.

The Variable Rate Mortgage is for some one who wants to play the market and watches the rates. They can lock their mortgage in at anytime to a fixed rate but the rate will fluctuate according to the market. The risk is not knowing what you will eventually end up locking into, payments maybe a lot higher than expected.

As far as deciding what’s best for YOU, there’s no right or wrong answer! It all depends on a risk and security factor that you’re comfortable with. Everyone has their own idea of how their monthly finances work within their household.

Talking to us just helps you to define your strategy in YOUR new mortgage.