Variable vs Fixed Mortgage Rates
What is a fixed rate mortgage?
Mortgage payments are paid in terms of principal and interest. With a fixed rate mortgage your payments are always the same amount of principal and the same amount of interest every month. So you are paying the same amount towards interest payments and equity every time you make a payment.
How is a fixed rate determined?
Fixed mortgage rates are determined based on the prime rate and the economic climate at the moment you’ve drawn up your agreement for your loan. Therefore, the interest rate during your term will always remain the same regardless of how the economy and prime rate are doing a few years later.
Why is a fixed rate mortgage good for you?
Though the cost of borrowing a mortgage on a fixed rate tends to be a little higher than borrowing on a variable rate there are still several advantages. First of all there is no risk. You will be making the same payments every month. If you have to adhere to a strict budget and do not have the financial security and flexibility to make varied payments, a fixed rate is good for you. It is definitely a less risky option when it comes to mortgage interest rates, though it can be more expensive. But the little more that you are paying can be seen as a type of insurance so that there are no nasty surprises.
What is a variable rate mortgage?
A variable rate mortgage varies and changes with the prime rate. When the prime rate is adjusted based on economic factors the variable rate on your mortgage loan will be adjusted as well. Therefore, your payments can be constantly changing based on economic factors.
How is a variable rate mortgage determined?
A variable rate fluctuates with the prime rate and will change every time the prime rate fluctuates.
Why is a variable rate mortgage good for you?
Variable rate mortgages, though riskier, tend to cost the borrower less in the long run. This is because as the prime rate lowers, the interest rate on the mortgage lowers. However, if the prime rate goes up the interest rate on the mortgage will go up as well. People who go for variable rate mortgages need to have the financial stability to be able to take a little risk. They can save money but they can also spend more money. It’s a gamble. If there is no need to adhere to a strict budget a variable rate mortgage may be good for you.
Remember, when you renegotiate your mortgage agreement you can always switch to another type of rate after your term is up. You’re not locked in for the entire duration of your mortgage. Consult a Loans Canada professional who can help you find the right rate for your lifestyle.