Should I Choose A Fixed Interest Rate Or A Variable Interest Rate?
Applying for a mortgage is never simple, but it’s even trickier when you don’t know what to expect. There are different aspects that you need to consider before settling on a mortgage product. You need to consider the mortgage term, conditions, down payment, etc. But most importantly, you need to consider what kind of interest rate to choose for the term of your mortgage.
Mortgage applicants can choose between fixed or variable interest rates. Each option has its own pros and cons, and therefore a choice should be made based on personal preference. However, which option is the right one for you? It’s important to understand the differences between variable interest rates and fixed interest rates if you’re considering a mortgage. Understanding the differences between the two can help save you money and meet your financial goals.
Fixed interest rate
A fixed interest rate provides the guarantee that your interest rate will never change during the term. That is typically five years but can be anywhere from one to ten. This can provide a lot of comfort if you are less risk-averse by providing consistency in your financing contract. It can also be a strong consideration in markets where the rate is expected to climb, and you plan to keep the home at least until your mortgage is up for renewal. The con to a fixed rate is that the penalties are significant compared to their counterpart. Breaking the mortgage early on a five-year fixed mortgage could equate to approximately 4.5% of the current mortgage balance. That said, over 60% of homeowners with five-year fixed mortgages break them within the first three years! From this standpoint, a fixed rate, especially anything five years or higher, can be a very risky bet if you’re unsure of your future plans.
Variable interest rate
A variable interest rate is attached to the prime lending rate and adjusts according to changes to this rate. This means if the government decides to increase the prime rate, your payment or amortization could go up. Conversely, if the prime lending rate drops as it has during the pandemic, then you benefit from a lower interest rate which decreases your payment or the time it takes to pay it off. A major factor that most don’t consider when choosing between interest rates is the penalty calculation. What most don’t know is that with a variable interest rate mortgage, your penalty is only worth three months’ interest. This means if life happens and you need to get out of your mortgage early, you will pay a significantly lower penalty than if you had a fixed rate.
Another benefit to a variable interest rate is the ability to convert into a fixed rate at any point during your term. If you get signs from your mortgage broker that rates may start climbing, you can lock in a current fixed rate and secure your payment going forward. Lastly, many don’t know that at Dominion Lending Centres, we work with banks that offer FIXED payments with their variable interest rate. This means you can take the worry out of wondering if your payment will ever jump up during the five-year term. Your payment will stay locked in no matter what happens, which can help a lot with budgeting and your overall comfort level.
It is important for you to work with someone who is not biased when it comes to mortgage rates. For example, did you know many bank employees at your local branch get yearly bonuses based on how many fixed rates they put clients in? By working with an independent broker, you can avoid this situation and obtain unbiased advice on what would work best for your situation. Every financial situation is unique and should be approached with due diligence as well as deep consideration into your future plans in real estate. The interest rate you choose should be based on your current stage of life, life goals, and risk tolerance. You may be constantly reminded through bank marketing to choose five-year fixed rates but as you’ve now learned this is primarily related to the high likelihood (over 60%) that you will break your mortgage early, incurring a massive penalty you will have to pay from equity in your home or from the proceeds of your home sale. This puts us in a position where we must educate new homeowners like you on the reasons why a variable may be the best option. As we like to say - when your life is variable, you should typically choose a variable rate.
If you are looking for a mortgage broker in Victoria, BC, then reach out to me at Cody Rowe today! With access to a vast network of major banks, credit unions, trust companies, and alternative lending options, I can ensure the correct solution for your unique situation. With access to over a hundred lender options, including major banks, credit unions, and trust companies, you can be certain I will fight to negotiate for your best interest.
My services include first-time homebuyer mortgages, mortgage renewals, mortgage refinancing, reverse mortgages, private mortgage lending, self-employed mortgages, investment property mortgages, new to canada mortgage, etc. For a complete list of my services, please click here. If you have any questions about my services, I would love to hear from you. Please contact me here.