This short article delves into fixed vs variable rate mortgage, and takes you through advantages of fixed rate mortgage, disadvantages of fixed rate mortgage, advantages of variable rate mortgage, and disadvantages of variable rate mortgage.
To start with, there is no right or wrong and there is no one-size-fits-all. Just last week, I saw some clients and recommended fixed and variable mortgages to them based on their individual situations. If you are wondering ‘is fixed rate better than variable’, or ‘is variable rate better than fixed rate’, read on.
Well, a fixed mortgage rate is where the interest rate is set for the term, which is typically 5 years for a mortgage, and does not change. So, if you get 2.99%, then, for next 5 years your rates will not change, i.e. as long as you don’t break or change your mortgage.
Advantages of Fixed Rate Mortgage:
Your payments don’t change for the term and you have peace of mind.
Disadvantages of Fixed Rate Mortgage:
In most cases you will have to pay interest rate differential when breaking or changing your mortgage, which can be thousands of dollars.
What is a Variable Rate Mortgage?
In a variable rate mortgage the mortgage rate changes based on prime rate, which is usually set. For example, today we can get variable at prime – .40, which is around 2.60%. If the prime rate goes up or down, your interest rate will be adjusted.
Advantages of Variable Rate Mortgage:
One, it can result in lower cost of borrowing: historically, people on variable rate interest end up paying lower than people on fixed rate mortgage. Two, it can result in lower penalty when breaking; you can get out of the mortgage with paying just 3 months interest.
Disadvantages of Variable Rate Mortgage:
The biggest disadvantage that comes to my mind is that fluctuating rates can be hard for some people to handle. In addition, there is the qualification on bank posted rate, wherein if you want to go with the variable rate mortgage, then you have to qualify based on the bank posted rate. Today’s rate is 5.25%. A lot of people won’t qualify for the bank posted rate.
As you can see, there is no right or wrong when it comes to fixed vs variable rate mortgage. Sit down with a mortgage broker in Tortonto and explain your individual situation. They should be able to recommend the right product for you. Don’t forget to subscribe to my channel to see useful videos. Feel free to like this article and leave comments
