Deciding Between Fixed and Variable
If you're on the fence about whether or not you should choose a variable or a fixed interest rate, then this is the article for you.
On my last post, we talked all about variable interest rates, the two different kinds that you can obtain, and the important features that you need to be aware of if you're going to choose a variable interest rate.
With that in mind, a lot of people are still on the fence about whether a fixed or a variable interest rate is right for them as for each individual situation, the choice is going to be different.
So, today's article is dedicated to fixed interest rates, the important things you need to know about them, why you might choose one, and the important features and differences between one lender and the other when it comes to fixed interest rates.
To begin, a fixed interest rate is best for people who are risk adverse, meaning that they don't want to deal with an up and down interest rate, similar to a variable interest rate, and they just want to have some guarantees in life.
However, with that in mind, in the current interest rate market that we're in, which is quite speculative, a lot of people aren't sure about whether rates are going down or going up in the long term. So when choosing a fixed interest rate, the major concern that most people have when choosing a fixed rate is the fear of missing out if rates continue to go down.
Because if you're not aware, with a fixed interest rate, you're locked into that rate, and generally speaking, if you want to get a lower interest rate, you're going to be stuck with either paying a penalty or your bank may require you to refinance, which means adding money to your mortgage, which in both situations defeats the entire purpose if the whole goal is to simply lower your interest rate, lower your payment and pay down the mortgage faster.
This is where talking about blending features for fixed interest rates can help you address things like the fear of missing out on lower rates, but still allow you to hedge against risk and take that fixed rate so that you don't have to be thinking about your mortgage every other week.
A proper blending feature will allow you to take a five-year fixed rate, and in situations where the interest rates drop during that time, you can blend your current rate into a new rate without any risk or penalty to do so.
For example, let's say that your current interest rate is 4.00%, and let's say in two and a half years' time, the interest rates are now at 3.00%.
In this example, the way it would work is you would take your current rate at 4% and blend into the the new rate at 3% based on a weighted average of how many months remaining in your current rate and the amount of months your adding with the new rate.
In this example, because we're right dab in the middle at two and a half years on that five-year term, you're going to get a new rate of 3.50%.
So, with no risk involved, you're lowering your interest costs by half 0.50%, lowering your payment, and of course paying down your mortgage faster.
Now, it’s really important to know that not all banks and lenders offer this ethical blending feature. In fact, most of them don't and the reason is it simply doesn’t line their pockets better to offer this to homeowners.
So if you have your mortgage with one of the big six banks, like I said earlier they're going to make you do one of two things if you want to blend that rate: pay a penalty or refinance your mortgage, completely defeating the purpose of trying to access a lower interest rate.
So in summary, if you’re on the fence about a variable rate, you may want to consider a blendable fixed rate instead to address the primary concerns of missing out on lower interest rates, but still making sure that they're hedging against risk and not having to go down that roller coaster of watching your variable interest rate.
If your mortgage is coming up for renewal, or you're looking to get into the market this year, feel free to give me a call, shoot me a message on social media, or you can always send me an email, and I'm happy to explain these blending features and help you determine whether or not they're the right fit for you.
Article by:
Cody Rowe
Mortgage Consultant
Dominion Lending Centres
Modern Mortgage Group
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Keywords: First time buyer, variable rates, fixed rates, bank of Canada, mortgage renewal, mortgage refinance, New home
