Recently, we have noticed many of our clients favouring a variable rate mortgage over a fixed rate. With interest rates climbing for much of the first half of 2022, it’s no surprise that many people are choosing the historically lower variable rate in order to lower their mortgage payments.
However, did you know that there are two different types of variable rates? Let’s take a look at the two different kinds to see which could be right for you.
A variable rate mortgage means that no matter the changes to the interest rate, your payment will always stay the same. This is the most common variable rate mortgage and is great if you want to take advantage of the lower interest rates but still want some security in your payment amount. Even if the prime rates increase significantly, you will still pay your agreed-upon payment amount. If the rates were to increase you would simply be paying less towards your principal mortgage balance and more towards the interest.
An adjustable-rate mortgage differs from a variable rate mortgage in that if the interest rate changes, so will your payment. This goes both ways so if the rate increases, your payments will too. Likewise, if the interest rates decrease, so will your payments. If you don’t mind a little risk in your mortgage and can afford to pay more should the rates increase, an adjustable-rate mortgage could be a great option for you.
Which is right for you?
As there is never a guarantee that interest rates will fall, there is always an element of risk to both types of variable rate mortgages. Typically we find that variable and adjustable rate mortgages are more popular when interest rates are high as it is seen as likely that rates will decrease.
When choosing between fixed, variable and adjustable rates it is important to carefully think about how comfortable you are with having an element of risk to your mortgage. If you prefer to have a single, locked-in interest rate and payment amount for the entire term of your mortgage, perhaps a fixed-rate mortgage would be right for you. However, if you want to take advantage of a lower rate and are comfortable with a little risk, perhaps a variable or adjustable rate mortgage could work for you.
If you are thinking of purchasing or even just making some changes to your existing mortgage, give us a call to see how we can help. As always, we are more than happy to run scenarios with you to see which rate type is best for you based on your specific circumstances.