First Time Home Buyer / Lenders / Mortgage Renewal / New to Canada / Pre-Approvals / Purchase / Qualifying / Rates & Terms / Refinance / Rental Properties / Variable Interest Rates

Fixed Rate vs. Variable Rate

If Interest Rates Were Shoes

Fixed would be Flats and the Variable would be Stilettos

If interest rates were shoes

Flats are our reliable go-to shoes. They are there for long walks, are comfortable and are generally thought of as being low risk. Same thoughts for fixed mortgage rates. Stiletto’s on the other hand…..va-va-voom. Variable interest rates are for those who are okay with some risk. Similar to walking on 4-inch heel, it requires an adventurous spirit. The mortgage market, like trendy shoe styles, is not the same today as it was 5 years ago, so I’m going to briefly compare the two options based on today’s mortgage environment. First, let’s start by highlighting the features of both fixed rate and variable rate terms, then we can explore which shoe best fits your financial foot.

With a fixed rate, you know exactly what interest rate you will get and what your payments are for the term you select.  Shopping for a fixed rate mortgage is like shopping for flats. The height of the heel is not an issue. What is important is the size and the price. The mortgage term is the size and the interest rate is the price. There are many selections available for both shoes and mortgages, but for now, here are the basics of a fixed rate & variable rate mortgage term;

 Fixed Rate Mortgage Term

– Interest rate does not change for whole term length

Fixed rate terms range from 1-10 years

– Mortgage payment stays the same for entire term length

Payout Penalty if you break your term early is the greater of 3 months interest or Interest Rate Differential

 Variable Rate Mortgage Term

Variable rates usually come in 1,3 & 5 year term lengths

– Mortgage payment may fluctuate based on the changing interest rate

– Most variable rate products allow you to convert to a fixed rate term at any time

Payout Penalty is usually only 3 months interest

– Have to use a higher rate to qualify at time of application

Stilettos make our feet look smaller and calves look more shapely than in flats. Historically, variable rates look better than fixed when it comes to the total interest charged over the term. In this case, the size of the heel does matter with variable rates as the discount to the prime rate is what directly affects you and your comfort level. For instance, if you are at prime less 0.25% and prime rate is 3% as of September 5th, your actual rate is 2.75%. If prime rate changes your rate changes which means your payment changes.  Hence, you are taking a risk walking on that linoleum floor in 4-inch heels, however, since they make your legs look fabulous, they may be worth the hazard.

So, do you go with the reliable fixed rate flat shoe mortgage where the payments and heel size are low risk and comfortable? Fixed rate terms have proven to be a first time homebuyer favourite and budgeters best friend due to the limited risk of rate and payment adjustments.

Or do you consider a variable rate high-heeled mortgage? A little more risqué as Prime Rate (which affects variable rates) only has to rise by 0.25% in order for the 5-year fixed rate to be lower than the best variable rate offered today. However, your wallet will likely benefit in the short term as variable rate payments are slightly lower than a comparable fixed rate payment right now, allowing for a slightly larger shoe budget or enabling you to reduce your mortgage principal faster.

Your mortgage, unlike your newest shoe purchase, is probably the biggest liability you will take on in your lifetime so it is imperative you are educated on the options available to you so you can make an informed decision about your financial future. If you’re not sure which shoe fits best a.k.a. which rate option is best suited to your needs, contact your mortgage professional to discuss amortization schedules, payment scenarios, and how they could affect your finances.

There are more rate options than just the above two; if you’re curious about the other options available to you please do not hesitate to contact the MortgageGirls to explore them at 780-433-8412 or info@mortgagegirl.ca. Stay in the loop by following us on Twitter.

 

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