Choosing a Fixed Rate Mortage or a Variable Rate Mortgage

 

 

Understanding Competitive Interest Rates

The interest rate is one of the biggest factors in determining the total cost of your mortgage over its term. Look for:

• Fixed vs. Variable Rates: Decide if you prefer the stability of a fixed-rate mortgage (with consistent payments) or the potential savings of a variable-rate mortgage (which may fluctuate based on market conditions).
• Compare Rates: Shop around with different lenders to find the most competitive rates. Even a slight difference can save you thousands over the life of the loan.
• Annual Percentage Rate (APR): The APR includes both the interest rate and any additional lender fees, so it’s a better representation of the total cost of borrowing. Compare APRs rather than just interest rates.

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Advantages of a Fixed Mortage Rate

A fixed-rate mortgage provides the security of stable payments, protection from rising interest rates, and easier financial planning, making it a solid choice for buyers looking for long-term stability and predictability in their housing costs. Here are some key benefits:

Advantages of a Variable Mortage Rate

A variable-rate mortgage can be a smart choice if you are looking for lower initial payments, anticipate selling or refinancing before the adjustable period, or expect interest rates to decrease in the future. It's best for buyers who have flexibility in their timeline or financial situation and are comfortable with the potential for future rate adjustments. Here are some of the key benefits:

1. Lower Initial Interest Rates

Variable-rate mortgages often come with a lower initial interest rate compared to fixed-rate mortgages. This lower starting rate can result in reduced monthly payments during the early years of the loan, making it more affordable upfront.

2. Potential for Decreasing Payments

If interest rates in the market decrease, your mortgage payments will also decrease. This flexibility can be beneficial if you anticipate a declining interest rate environment, allowing you to save money over the long term.

3. More Affordable in the Short Term

A variable-rate mortgage is ideal for buyers who plan to sell or refinance within a few years. The lower introductory rates can result in significant savings if you're not intending to keep the mortgage for the full term.

4. More Home for Your Money

Because the initial payments on a variable-rate mortgage are lower, you may qualify for a larger loan amount, potentially allowing you to buy a more expensive home than you could with a fixed-rate mortgage.

5. Flexibility

Variable-rate mortgages often have fixed-rate periods at the start (such as 3, 5, or 7 years) during which the rate stays constant. After that, the rate adjusts based on market conditions. This structure can be ideal if you plan to move or expect changes in your financial situation before the rate starts to adjust.

6. Benefit from a Downward Rate Trend

If market interest rates fall over time, a variable-rate mortgage allows you to take advantage of these decreases without needing to refinance. Your interest rate will adjust downward automatically, potentially reducing your monthly payments and overall interest cost.

7. Potential Savings Over the Loan Term

If you expect that interest rates will remain stable or drop in the future, you could end up paying less over the life of the loan than you would with a fixed-rate mortgage. This can be a long-term money-saving strategy, depending on the market environment.

8. Early Payoff Opportunity

Some buyers who anticipate a salary increase or other windfall may opt for a variable-rate mortgage. They can take advantage of lower payments in the early years and pay off the loan before the interest rate adjusts upward.

9. Fewer Upfront Costs

Some variable-rate mortgage options come with lower initial fees and closing costs than their fixed-rate counterparts. This can make it easier to get into a home with less cash needed upfront.

Mortage Considerations Beyond the Rate

When searching for a good mortgage, there are several key factors you’ll want to consider to ensure you're getting the best deal possible. A good mortgage goes beyond just a low interest rate—it includes terms that fit your financial situation, your long-term goals, and your lifestyle. Here’s what to look for:

Loan Term

The loan term (the number of years over which you’ll repay the mortgage) directly impacts your monthly payments and the total interest you’ll pay over time. Common terms include:

• 15-Year Mortgage: Higher monthly payments but less interest paid over time.
• 30-Year Mortgage: Lower monthly payments but more interest paid over the life of the loan.
• 20 or 25-Year Mortgage: May offer a compromise between monthly payments and total interest costs.

Choose a term that fits your financial situation and long-term goals.

Speed Up Your Payments

If you are currently paying a monthly mortage payment, you can accelerate these payments by switching your payment schedule. This will lower your principal amount and save you money over the term of your loan by reducing the interest  you will pay on the life of the mortage. 

Low Fees and Closing Costs

In addition to the interest rate, be aware of the various fees associated with taking out a mortgage. These can include:

• Origination fees: Charged by the lender for processing the loan.
• Appraisal fees: For valuing the home.
• Underwriting fees: For verifying your application details.
• Prepayment penalties: Fees for paying off the loan early.

Some lenders may offer lower fees or cover part of the closing costs, so ask about these charges upfront and factor them into your comparison.

Flexible Down Payment Requirements

The amount of your down payment will influence the size of your mortgage and whether you need to pay mortgage insurance:

• Conventional Loans: Often require a 20% down payment to avoid private mortgage insurance (PMI), but some lenders offer options with as little as 5% down.
• Government-backed Loans: As a housing finance solution, Canada Mortage and Housing Corporation (CMHC) provides mortage loan insurance, allowing for lower down payments of 5%. This is beneficial especially for first-time homebuyers, or those with a smaller down payment. Your lendor will be aware of this support at the time of your pre-approval.

Consider how much you’re able to put down and the flexibility offered by the lender. To avoid paying mortage insurance, consider a down payment of 20% or more. 

Prepayment Options

Look for a mortgage that allows you to make extra payments without penalty. Paying a lump sum toward the principal can significantly reduce the total interest paid and shorten your loan term. This amount is usually determined on a per year basis as a one time payment, outside your regular payments. Some lenders offer:

• Open Mortage: You can increase your payments, pay in full, refinance or renegotiate at anytime through out the mortage term without a prepayment penalty charge.
• Closed Mortage: An annual pre-determined amount, allows you to put extra money toward the principal when you can. This can be done in a lump-sum or through the increase of your payment amount.

Portability

If you think you might move during the mortgage term, a portable mortgage can be beneficial. Portability allows you to transfer your mortgage to a new property without incurring penalties or needing to refinance. This feature can save you money and hassle down the line.

Penalties and Fees for Changes

Some mortgages carry stiff penalties for breaking the mortgage early (for example, if you sell your home or refinance before the term is up). Ensure you understand the costs involved with:

• Early repayment: If there are fees for paying off the loan before the term ends.
• Breaking the mortgage: Look into how much you would be charged if you decide to sell or refinance before your mortgage term is up.

Customer Service and Support

Consider the quality of customer service your lender offers. A good mortgage experience is not just about the numbers, but also about the support and advice you receive throughout the process. Look for:

• Responsiveness: How quickly the lender responds to your inquiries.
• Flexibility: Will the lender work with you if your financial situation changes?
• Reputation: Read reviews and ask for recommendations from friends or family who’ve had positive experiences with their lenders.

Special Programs or Incentives

Some lenders offer special mortgage programs, such as:

• First-time homebuyer incentives: These may include lower rates or down payment assistance.
• Green home programs: Offering incentives for energy-efficient homes.
• Interest rate lock-ins: Some lenders allow you to lock in an interest rate for a certain period, protecting you from rising rates during the homebuying process.

Flexibility in Loan Terms

Depending on your financial situation, you may want a mortgage that offers flexibility, such as:

• Convertible mortgages: Allows you to switch from a variable-rate to a fixed-rate mortgage during the loan term if market conditions change.
• Open mortgages: Let you pay off the loan early without penalties, though they may have higher interest rates.

In Summary

A good mortgage offers a balance of competitive interest rates, manageable fees, flexible terms, and responsive customer service. It’s important to compare multiple lenders, understand the long-term costs, and ensure the mortgage fits your current financial situation and future goals.

If you’d like help comparing specific mortgage options, feel free to reach out!