A common question that we hear a lot is what the difference is between a fixed-rate and a variable-rate mortgage. Here we will break down the terms for you to help you make your decision between the two types of mortgages.
FIXED RATES
A fixed-rate mortgage means your lender gives you a rate that stays the same throughout the length of your term.
A five-year term is the most common in Canada — meaning if you settle on a rate of say, 2.14%, then you will pay 2.14% on your mortgage for the five years until your term is over — at which point you’ll be up for renewal. It’s common to see fixed-rate mortgages with lower rates than their variable counterparts.
Fixed-rate mortgages follow the bond market
VARIABLE RATES
A variable-rate mortgage, on the other hand, can change with the market. It will often follow the lender’s prime rate — which is influenced by the Bank of Canada.
If you get a variable-rate mortgage at 2.99% and the prime rate drops by 25 basis points, your variable rate will drop to 2.74%. The other way around, if the prime rate increases 25 basis points, your rate will rise to 3.24%.
Variable-rate mortgages typically offer lower rates because they’re less of a risk to the bank — if a bank’s borrowing costs are lowered, they get passed on to you and vice versa. With fixed rates, if rates rise, the bank can’t pass those costs on to you.
Variable-rate mortgages follow the Bank of Canada
WHICH IS RIGHT FOR YOU?
On average, variable rates have typically been lower than the fixed rate over a five-year term. Ultimately it comes down to whether you want to take the risk that rates won’t rise too much over the course of your term.
It’s a good idea to ask yourself the following questions:
How large a mortgage payment can I afford today?
Could I still afford a variable rate if interest rates rise?
How long will I live on the property?
In what direction are interest rates heading? Are the rates expected to continue this trend?
Perhaps consider increasing your variable rate payment instead of taking the savings to help offset the risk. Also, you could consider a split mortgage, half fixed and half variable to enjoy the best of both worlds. If you would like advice on what type of rate is best for you, reach out to our team today!