April 22, 2022 SEP Dev

Should I choose a fixed or variable rate mortgage?

This is a never-ending debate and in my opinion, one that will continue forever. Which mortgage option should I go with, fixed or variable rate mortgage? Let’s get right to it:

 

Fixed Mortgage:

  • Interest rate & payment remains the same throughout the term
  • Penalty to break mortgage can greater than 3 months interest
  • Starting rate is typically higher than a variable rate

 

Variable Rate:

  • Interest rate can fluctuate throughout the term, causing principal and interest payments to adjust
  • Penalty to break mortgage is typically 3 months interest (max)
  • Starting rate is typically lower than a fixed rate

 

The answer to which one you should choose comes down to your circumstances, which may differ from somebody else’s. For example, if you plan on living in your home for the entire term of the mortgage and do not react well to payment fluctuations, then the fixed mortgage rate would be better for you. At the end of the day, it’s not all about dollars and cents because if it causes you distress to be in a variable mortgage, one that may cause you to pay more interest, then I’m sure you’d agree that peace of mind priceless.

 

However, if you are adaptable to change and are tolerant to the risk of rising rates, along with the initial spread between the variable rate and the fixed rate, then you may be more suited to take the variable option. For example, if the variable rate is Prime-1% = 1.85% and the fixed rates are 3.5%, then the variable rate would need to rise by 1.65% to reach this “breakeven” point during the term of the mortgage. If you believe this is unlikely or at least would not exceed the fixed rate over this period, then you would benefit from the variable rate. Of course, nobody has a crystal ball and can predict what will happen in the end, but the variable requires you to assess your financial and personal tolerance to these likely changes throughout the mortgage term.

 

In recent months, we’ve seen an uptick in people opting for Variable rate mortgages, but not necessarily from a risk assessment standpoint. The decision to go with the variable rate has been heavily determined by the rate “just being the lowest right now”. It seems many people that are behaving this way are doing so with a short-sighted approach in their decision-making process. Time will tell where things go from here but choosing between variable and fixed rates based on today alone, could end up being a costly decision. Although we’ve been used to this low-rate environment for the last decade or more, it doesn’t guarantee that this will continue moving forward…

 

If you would like to discuss your situation on this topic or would like further guidance on the different mortgage types, feel free to reach out today – at  905.455.5006

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