The right mortgage can save you time, stress, and money
For most people, buying a home means taking on the largest financial commitment of your life. The stress involved can be quite significant, especially for first time buyers who have never gone through the process before. One of the biggest decisions buyers must make is whether to opt for a fixed or variable rate mortgage. But before this choice can be made, it’s important to understand the difference between these two options, as well as the pros and cons of each.
WHAT IS A FIXED MORTGAGE?
A fixed mortgage has a static rate of interest throughout the entire term of the mortgage and is not impacted by exterior factors or market forces. Fixed-rate mortgages are determined by the Government of Canada’s bond yields at the time of purchase, and don’t change even if the bond yields do. Therefore, there are no surprises; monthly payments remain the same for the duration of the term, which typically starts at 5 years.
WHAT IS A VARIABLE MORTGAGE?
On the other hand, a variable rate mortgage has a rate that will vary throughout the term. The rate for a variable mortgage is set at a premium above or below the institutions’ prime pate, which is closely tied to the Bank of Canada’s overnight lending rate. If the prime rate increases during the term, so does your mortgage rate. In some variable mortgages, a change in the rate won’t impact the amount of the monthly payment, just the portion of your payment that will be used to pay off interest versus what goes towards the principal. If the prime rate decreases, the opposite will happen. In other variable mortgages, however, the amount of the monthly payment will change along with movement in the rate.
HOW TO CHOOSE WHAT’S RIGHT FOR ME?
Choosing the right mortgage is never just about an optimal rate. In fact, rates on the whole are very favourable today, regardless of which type of mortgage you choose. Deciding between a fixed or variable product is not always an easy decision and it depends on your tolerance for risk as well as your ability to withstand an increase in the mortgage payment; this is where a mortgage broker comes into play as there is risk and reward with each mortgage type. Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. Historically, the vast majority of Canadians – almost 75% – have opted for fixed mortgages. However, fixed rate products usually entail higher fees if the mortgage needs to be broken before its term expires, so if that’s a possibility it’s something that should be considered.
There are many facets to consider, and no truly right or wrong choice, it’s really about deciding what suits your personal situation, and plans for the future. Ultimately the decision of which type of mortgage to choose is up the client, but brokers are there to present the options and explain their risks and benefits.
WHY WORK WITH AN INDEPENDENT MORTGAGE BROKER?
It’s never advisable to choose a mortgage without expert advice. It’s a mortgage broker’s job to present you with all appropriate options for your individual needs in an unbiased way. Our experts show you the pros and cons of each option you’re qualified for, and help you make a choice that’s tailored to your situation. No two buyers are exactly alike, and neither are their mortgage needs. Independent mortgage brokers offer a distinct advantage because they have access to advantageous rates and products from the widest number of lending institutions across Canada. More options, better deals. Saving you time, stress, and money is what we do!
