28 Nov Choosing between a fixed or variable-rate mortgage
Choosing between a fixed or variable-rate mortgage
Fixed Or Variable-rate mortgage? High Stakes For Homeowners
Choosing between a fixed or variable-rate mortgage has become a high-stakes decision. While variable-rate mortgages lost favor due to Bank of Canada interest rate hikes, fixed-rate mortgages have also risen from pandemic lows. Some borrowers still opt for variable rates, believing that rates have peaked and are comfortable with their payments. Variable rates often have less severe penalties for early loan termination.
Traditionally, variable rates were slightly lower than fixed ones, but now, five-year variable-rate mortgages are often more expensive. This means that variable-rate borrowers need Canada’s central bank to lower prime rates for savings. The Bank of Canada recently kept its key rate steady but signaled future increases to combat inflation.
Variable-rate borrowers must be prepared for potential rate hikes and consider higher monthly payments or longer loan terms. Converting a variable-rate mortgage to a fixed one may incur penalties. Fixed rates offer stability but are currently at their highest in years.
Below is a summary of the pros and cons of each:
Fixed Mortgages
Pros
- predictable payments – monthly payment set out at the beginning of the mortgage, helping you budget.
- stability in changing markets – when market rates are fluctuating, fixed mortgage has the same rate if the market rate is rising.
Cons
- the security of a constant rate and monthly payment, may mean higher rate and costs compared to variable mortgages
- if market rates are declining, you are not able to take advantage of them without refinancing
Variable Mortgages
Pros
- May mean lower costs as they generally start with lower interest rates than fixed mortgages, as long as interest rates remain stable or decline
- Opportunity to take advantage of declining interest rates and lower monthly payments
Cons
- “Variable” is just that, they change with the market rate, meaning when rates rise, monthly payments do
- Greater risk when interest rates rise and harder to budget – may make financial planning difficult
To make the right choice, start by examining your budget and actual expenses. Many Canadians are shifting back to fixed-rate mortgages for monthly stability. Some are opting for shorter terms, hoping rates will fall in the future. Seek personalized advice from financial professionals to match the loan with your unique situation, goals, and life stage.
Sources: Reni McNeil of Mortgage Brokers Ottawa & Joan Smith, Broker, Royal LePage Team Realty
Feel free to contact us, we are always happy to answer your questions and also put you in touch with other professionals, i.e. mortgage broker, lawyer, movers, etc. As experienced real estate agents in the greater Ottawa area we would be pleased to assist you!