Variable vs Fixed Mortgage Rates

November 3, 2015

There are many questions you need to ask yourself when planning on buying a new home or renewing your mortgage. One of the first questions that you may be asking yourself is, “What is the difference between a variable rate mortgage and a fixed rate mortgage?”

What is a Fixed Rate Mortgage?

The interest rate on a Fixed Rate Mortgage is set for a pre-determined term – usually between 6 months to 10 years. A fixed rate offers the security of knowing what you will be paying for the term selected.

Fixed Rate Mortgage Benefits:

  • Rate is guaranteed throughout your term.
  • Peace of mind knowing your payments will not change.
  • Typically fixed rate terms are portable.

Fixed Rate Mortgage Drawbacks:

  • Can come with higher penalties (Interest Rate Differential or 3 months interest, whichever is greater).
  • Historically are higher than a variable rate.

Going the fixed rate route is often popular for first time home buyers, clients who are rate sensitive or risk adverse, and clients who like to stick to a monthly budget and don’t like their payments to fluctuate.

What is a Variable Rate Mortgage?

With a Variable Rate Mortgage, payments will fluctuate month to month depending on the prime interest rate. If interest rates go down, more of the payment goes towards reducing the principal. If rates go up, a larger portion of the monthly payment goes towards covering the interest.

Variable Rate Mortgage Benefits:

  • You may be able to capitalize on a low prime rate.
  • Lower penalties if you break before the end of your term (typically a 3-month interest penalty).
  • Historically are lower than a fixed rate.

Variable Rate Mortgage Drawbacks:

  • Rate and payments can fluctuate during your term.
  • Some variable mortgage rates aren’t portable (transferring a mortgage from one property to another) if you sell the home within your mortgage term.

Variable Rate Mortgages are popular with clients who can handle small amounts of risk and who want to be aggressive when maximizing their savings on their mortgage term. These clients typically have a budget that can afford a higher payment if the rate increases. Variable Rate Mortgages also work well for people that need to break their mortgage before the end of their term.

When it comes to Variable vs Fixed, our Mortgage Specialists can help you determine which mortgage option is best for you.

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Read More: How to get out of a Mortgage - What you need to know

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