September 7, 2018 Kristen Godel

Fixed or Flexible Mortgages: What You Need to Know When Buying a Home

Are you a first time home buyer debating between a fixed or variable mortgage? If you are, this is not an unusual dilemma to be in as a first time home buyer, and as a first time home buyer, hopefully choosing between rates will be the only difficulty you face. Choosing the right rate is a very subjective choice. You can easily read up on what the ‘best’ type of rate is, but even then, it’s very much the opinion of the author. The truth is, you’ll always benefit immediately from a variable rate over a fixed rate, as historically speaking, the variable rate is always lower. Having said that, the risk you assume by choosing a variable rate is that your rate will fluctuate given the current prime lending rate at every point throughout the term of your mortgage.

As a <a href=”/canadian-mortgage-services-first-time-home-buyer-checklist/”>first time home buyer</a>, we can understand how this can be scary. Rightfully so, you’re very much concerned about stability and consistency. If so, perhaps the fixed rate option is best for you. If you’re a little more risk adverse, a variable option will yield more savings. Keep in mind, there is no right or wrong answer. There is the ‘comfortable’ answer. Advertisements don’t help with the confusion… and let’s be honest, we know those advertisements are catered to first time home buyers anyways.  Simply put, here are some pros and cons to each option:

Tips to help the first time home buyer choose between fixed and variable mortgage rates:

  • Assess your long term financial plans. It’s not uncommon to neglect this as a first time home buyer. You’ll get absorbed in the excitement of purchasing and forget to factor in changes such as having children, attending school again, changing careers, etc. If you foresee there to be a period of decreased disposable income, perhaps consistency if the way to go (fixed). If you foresee a much better financial situation with a higher disposable income perhaps variable is the way to go.
  • If you’re economically savvy, do you own assessment of where you see the economy heading? If you’re not economically savvy, you can easily keep up to date with trends and news. If you’re able to make these accurate predictions, you’ll know whether fixed or variable is best at the present time of you purchasing (and throughout the duration of the mortgage).
  • I’ll admit, first time home buyers are very fixated on getting the absolute lowest rate possible, and usually that is a variable rate. Step back and really take a look at the bigger picture… compare the actual payment and figure out if you’re making the right choice, for the right reasons.
  • Find your breaking point – In other words, find out if a 1-2% increase in rates will break the bank (1%-2% is fairly dramatic as a one-time rise in rates, as usually you’ll be a 0.25% increase at a time). Will this hurt you though? If so, choose consistency over savings. With a variable rate, you may not want to take the chance of your rate skyrocketing is the market/economy takes a tumble.
  • Do you plan on breaking the mortgage within the term? Again, this might not be something a first time home buyer considers, but make this a topic of conversation! If you might consider breaking the mortgage within the term (refinancing or selling), a variable mortgage option will almost always yield the lowest penalty.

These are some really great tips to help any first time home buyer ease the dilemma of choosing between fixed and variable rates. It’s often hard to come across these points but these are the important point you should be analyzing when trying to settle on your rate choice. Good luck!