Interest Rates: Fixed vs Variable
What to do?? This is always a tough decision when choosing a mortgage product but what it really comes down to is risk tolerance and your personal situation.
Variable rate mortgages generally have a more attractive interest rate compared to fixed rate mortgages but your rate can change any time, down or up, during your mortgage term. This can be a very beneficial feature in a falling rate environment but during a period of rising rates this can cause your payments to increase as well as your rate.
The variable rate mortgage is based on Prime rate and most lenders offer a ‘Prime minus' product which means you will pay a set amount below Prime for the duration of the term. Prime rate is set by the Banks and is based on the Bank of Canada rate which is determined by current economic conditions.
If you choose a variable rate mortgage and rates begin rising you have the ability to lock in your mortgage rate but the downside to this is that the fixed rate terms that you are looking to lock in to may already have increased from what they would have been at the outset of your mortgage.
A fixed rate mortgage will likely have a slightly higher rate in comparison to the variable but on the upside you are guaranteed the rate for whichever term it is that you choose which can be anywhere from 6 months to 10 years. The extra interest that you pay is almost like an insurance premium to know where you are at each month and many people prefer this type of comfort over the uncertainty of the variable rate mortgage.
Some lenders also have a product that allows for a variable rate of interest with a pre-determined cap rate. This would mean that your mortgage rate would float based on Prime but would hit a ceiling at a certain rate and would not go over that rate during the term. This product gives you the benefits of both types of mortgages but only to a limited degree in that the discount off Prime rate may be lower than normal and the capped rate would be higher than the fully discounted fixed rate mortgages.
So it's up to you....if you are able to withstand some volatility in order to get a bit better rate or you prefer the security of knowing exactly where you will be for the term of your mortgage.....or something in between...........the choice is yours.
Please feel free to contact me any time to discuss your individual financing requirements or to provide some insight regarding current market trends.
Jerry Sims is a mortgage broker with Ambro & Associates Mortgage Consultants Ltd. with over 20 years of lending, banking and financial planning experience. A highly satisfied and loyal client base can attest to Jerry's knowledgeable, creative and caring service that rises above and beyond expectations. Jerry has worked at several financial institutions in the capacity of loans officer, branch manager and credit manager.
Please feel free to ask John for an endorsement if you would like to know more about my services.