April 22, 2022 SEP Dev

Which is better, a variable or fixed rate?

This is probably the most common conundrum that homeowners face when deciding on which path to choose. The simple answer is that it’s not that simple. If one were better than the other, then what good would there be for the other to exist?

The best way to approach these questions is to apply each scenario to your circumstances. You’ll soon learn that one option is more suitable for you vs the other and the same may not be true for your neighbor.

From a statistical standpoint, more homeowners tend to favor the fixed mortgage option when compared to the variable counterpart. The main reason for this is the “peace of mind” of knowing that your payment/amortization schedule will also remain “fixed” and unchanged over the term of the mortgage. This means that as a homeowner, you can easily budget your finances according to your lifestyle requirements. You’ve also probably noticed the term “5-year fixed” being used all that time in ad campaigns across various banks. This is because this particular mortgage offering also happens to be the product that most banks and lenders compete on. As a result, this competition can lead to better value (although that’s not always the case).

Variable mortgages on the other hand carry a risk of rising rates over a given period. In recent history, many more people have become accustomed to choosing the variable route because interest rates have been low for at least the past decade. You’ll also notice that at any given time, Variable rates happen to be lower than a fixed mortgage option. One reason that this is the case is that if the variable option were the same as the fixed-rate, then it would be a “no-brainer” to choose the Fixed option since it doesn’t carry the risk of increasing over time. Another reason Variable rates are growing in popularity right now is due to affordability. Since variable rates can be 1% less (or greater) than a 5-year fixed option, this can significantly affect the size of the scheduled mortgage payment. Although this can change over time if the prime rate increases, many homeowners look at the initial repayment obligation and go with the short-sighted option.

There are too many scenarios that could decide the winner of the fixed vs Variable debate and the key to understanding which one applies to you, is you. If you would like to learn more about Fixed and variable rates mortgages or would like us to help you settle this debate as it applies to you personally, feel free to reach out to us at any time  – 905.455.5006

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