What is Fixed or Variable Rate Mortgage?

March 31, 2021

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Buying a home is exciting time but it can also bring its own challenges. One of the first thing homebuyers have to decide whether to go with fixed rate or a variable rate mortgage for their new home purchase. Let us discuss what are some of the differences between these two mortgages.

Fixed Rate Mortgage

One of the biggest benefit of a fixed rate mortgage is that the interest rate of the mortgage will remain same for the duration of the mortgage term. There are no surprises and you will know exactly how much of your mortgage payment is going towards interest and to the principal repayment. This stability can help make your payments more manageable and allows you to budget.
This same advantage of a fixed rate mortgage can be a disadvantage too when the interest rates are down because your interest rates are locked and they will not go down. Yes, on the other hand if the interest rate do go up, you will not have to worry for that rate increase with a fixed mortgage.
Fixed rate mortgages can be open (may be paid off at any time without any penalties) or closed (penalties applies if paid off prior to mortgage term). If you have locked in a fixed rate closed mortgage and you want to change your mortgage to a low interest rate you will have to pay penalties to make changes. These penalties could be really high depending on the mortgage term and amount.

Variable Rate Mortgage

A variable rate mortgage means the interest rate of the mortgage will fluctuate during the mortgage term, as these mortgages are tied with the prime lending rate set by the Bank of Canada. This means that your mortgage interest rate will change when the prime rate changes.
Similar to the fixed rate mortgage, variable rate mortgages can be open or closed, offering different prepayment privileges. The major difference however is that amount of penalty is capped at 3 months of interest for a variable rate mortgage.
Which of these mortgage options are right for you will ultimately depends on your situation and your preferences. If you want to have flexibility to pay off your mortgage as soon as possible and expect the market to be stable, a variable rate mortgage might be the right choice for you. On the other hand, if you prefer to have the security of knowing exactly what you will be paying in mortgage payments every month, regardless of market, a fixed rate mortgage might be better for you.

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