“A fixed mortgage or a variable mortgage ?” It’s one of the most common questions first-time home buyers or those renewing a mortgage in Toronto ask, and it can be a complicated decision. To decide which one is best for you, you need to make a comparison and determine which one fits your long-term financial and lifestyle needs.
What is a Fixed Mortgage Rate?
A fixed-rate mortgage is a mortgage where the interest rate is set, or fixed, and will not change over the duration of the term of the mortgage, regardless of the amortization period.
If interest rates are low and you don’t think they’ll fall any further, a fixed mortgage rate might be right for you; in fact, the majority of mortgages in Toronto are fixed-rate mortgages. Most people like fixed-rate mortgages because they provide stability and the locked-in rate means you know how much principal and interest you pay on each mortgage payment.
What Is a Variable Mortgage Rate?
If you think interest rates are going to fall, you might want to consider a variable-rate mortgage.
A variable-rate mortgage, often called a floating-rate mortgage , is a mortgage with an interest rate that fluctuates over the life of the term. A variable-rate mortgage is quoted as prime+/- a specific amount. While the prime lending rate could fluctuate, the quote (relationship to prime) will stay the same over the duration of the term.
The Bank of Canada adjusts the prime rate depending on the strength of the economy. If inflation is high, the Bank will increase the prime rate to make borrowing more expensive and when inflation is low, the Bank will cut the prime rate to encourage borrowing.
If the Bank of Canada lowers the prime interest rate, your mortgage rate will go down and a bigger amount of your mortgage payment goes toward the principal—and the faster your mortgage gets paid off.
Conversely, if the Bank of Canada raises its key lending rate, your mortgage rate will go up and a small amount of your mortgage payment will go toward the principal. Because less is going toward the principal, the amortization period of your mortgage is extended.
Which is Better? A Fixed or Variable Mortgage Rate?
There is no one-size-fits-all approach to mortgages in Toronto . You need to decide which one fits your comfort level and financial needs.
There is a risk/reward payoff with a variable-rate mortgage. Many people chose one because the interest rate is usually lower than that of a fixed-rate mortgage.
Right now, interest rates are near historic lows, but they will start to increase. And because they are so low, it’s quite possible rates could double over the next year or so. This will greatly impact how much of your mortgage payment goes to paying down the principal.
The benefits of a fixed rate mortgage is that you know exactly what the interest rate is over the life of your mortgage. One of the downsides of a fixed mortgage rate is that you cannot take advantage of a lower interest rate. As a homeowner, you need to ask yourself if it’s important to know exactly what your interest rate is going to be over the next five or 10 years.
Canadalend.com—Helping You Find the Best Mortgage Products
The busy spring home buying season is here. But before you buy your dream home, it’s important to talk to one of Canadalend.com’s independent licensed agents so you know how much of a house you can afford. They’ll also help you decide whether a fixed-rate mortgage or variable-rate mortgage is best for you.
As the nation’s leading low-cost private mortgage solution provider , Canadalend.com agents draw from hundreds of banks and lenders to help you secure the mortgage products best suited to your financial needs. Many of these lenders specialize in providing mortgages to clients that are self-employed, have a recent employment history, have bruised credit, and/or have declared bankruptcy,
To find out whether a fixed-rate mortgage or a variable-rate mortgage is better for you, contact Canadalend.com today or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.