Whether you’re getting a new mortgage or renewing for another term, you’ve probably thought about whether a fixed-rate or a variable-rate mortgage is the way to go. Both of these mortgages are different in how they work and what impacts their rates. And even though fixed-rate mortgages are typically more popular, it’s always worth considering whether a variable-rate mortgage could work for you, and if rates rise, fixed or variable, how do you protect yourself?
Let’s start with fixed-rate mortgages. Choose this type of loan, and you’re basically guaranteed that your mortgage payments won’t change for five years. Banks typically like to compete on these mortgages, so you’ll usually get the best value when you go this route.
When setting fixed mortgage rates, Canadian lenders analyze their own borrowing costs, and these costs are directly linked to the changes that occur with the Bank of Canada 5-year bonds. This means that when yields go up, the costs for banks rise, and the costs for mortgages also goes up. The opposite also happens, and when yields go down, the costs for banks decrease and mortgage rates go down.
Variable-rate mortgages are tied directly to the prime rate, so they can be a little riskier, but they are usually lower than fixed rates. And since mortgage rates are at historic lows right now, we’re seeing more and more of our clients go with variable-rate mortgages.
When you choose a variable-rate mortgage, you’ll receive an offer for a variable rate that is prime minus a discount, which typically ranges anywhere from 0.3 to 1.55% off prime. The Bank of Canada determines the prime rate and adjusts it based on forecasts, pressures, and financial and economic conditions. This means that when you go with this type of mortgage, you take on the risk of your payments potentially increasing.
What You Need to Think About
Your choice between a fixed-rate and variable-rate mortgage should come down to three factors:
- If you plan to sell your home within three years, or if you want a potential way to quickly pay down your mortgage.
- If you can sleep soundly at night knowing that there are risks that come with variable rate mortgages.
- If your budget can handle a potential 3 to 4 percent increase if the prime rate increases significantly.
This is a lot to consider, so if you’re still not sure about whether you should choose a fixed-rate or variable-rate mortgage, come and talk to us at Donna Mullen & Associates. We’ll break down all of your options, discuss what the best mortgage is for you, and help you find a great rate on your loan.