Posted On Dec 10, 2024
Even before I became a mortgage broker, I’ll admit that when my family and I bought our second home, I didn’t fully understand the difference between fixed-rate and variable-rate mortgages. At the time, we weren’t given a clear breakdown of how each option would impact us long term. Now, we find ourselves locked into a higher fixed-rate mortgage than what we would be paying with a variable-rate mortgage. With the upcoming Bank of Canada rate cut, I can’t help but wonder if we could’ve saved money if we had been better prepared and knew our options at the time.
What Are Fixed-Rate Mortgages?
A fixed-rate mortgage is exactly what it sounds like: a mortgage where the interest rate remains the same for the entire term of your loan. This provides a sense of security because no matter what happens with the market, your payments won’t change. Whether interest rates go up or down, you can count on predictable monthly payments, which can make budgeting and planning much easier. If you prefer consistency and a clear understanding of your financial future, a fixed-rate mortgage may be a great option for you.
What Are Variable-Rate Mortgages?
A variable-rate mortgage differs because the interest rate can change during the term of your mortgage. This rate is usually tied to the prime rate, which is influenced by changes to the Bank of Canada’s overnight rate. Essentially, the interest rate can fluctuate over time, meaning that while your payment amount stays the same, how much of your payment goes toward interest versus principal can change. If the prime rate rises, you could end up paying more interest and have your mortgage take longer to pay off.
To help you weigh your options, let’s take a look at the pros and cons of both mortgage types:
Fixed-Rate Mortgages:
Pros:
- Predictable payments every month, no surprises.
- Protected from interest rate fluctuations.
- Great for those who prefer stability and a set budget.
Cons:
- May pay a premium for stability; you could end up paying more over time.
- No opportunity to take advantage of falling interest rates.
- Less flexibility if you need to change your mortgage terms.
Variable-Rate Mortgages:
Pros:
- Lower initial interest rate means lower payments in the beginning.
- Potential to benefit from falling interest rates.
- Flexibility to switch to a fixed-rate mortgage down the road if needed.
Cons:
- Payments can increase if the prime rate goes up.
- You may pay more interest in the long run if rates rise significantly.
- The amount applied to principal can vary, potentially extending your mortgage term.
Open vs. Closed Mortgages:
Now, on top of having to choose between a fixed-rate and variable-rate mortgage, you also need to decide whether an open or closed mortgage is right for you. An open mortgage allows you to pay off your mortgage early, without penalties, giving you flexibility to pay off your loan faster or refinance if rates drop. A closed mortgage, however, typically has penalties for early repayment but may offer a lower interest rate to start with. It all comes down to how much flexibility you need versus the cost savings upfront.
How Do You Know Which One is Right for You?
Choosing between a fixed or variable-rate mortgage is a highly personal decision, and what works for one person may not work for another. Here are a few factors to consider when making your decision:
- Your Financial Stability: If you have a stable income and can comfortably handle potential increases in your mortgage payments, a variable-rate mortgage might be a good option. However, if you prefer predictability and financial security, a fixed-rate mortgage could be the better choice.
- Your Timeframe: Are you planning to stay in your home long-term or move in a few years? If you’re planning to sell in the next few years, a variable-rate mortgage could save you money due to the lower initial rates. On the other hand, if you’re planning to stay in your home for the long haul, a fixed-rate mortgage may offer better security.
- Market Conditions: It’s also important to consider the current interest rate environment. If interest rates are low and expected to stay stable, a variable-rate mortgage could work in your favor. However, if rates are rising or expected to rise, a fixed-rate mortgage might be the safer bet.
- Risk Tolerance: Some buyers are comfortable with the idea of their payments fluctuating, while others prefer the stability of fixed payments. Understanding your own comfort level with financial risk can help you decide which option is the best fit.
How a Mortgage Broker Can Help You Decide
Looking back at my own homebuying journey, I truly wish I had the guidance of a mortgage broker to help me weigh all my options more carefully. While I made my decisions based on the information I had, I realize now that having someone with experience help me consider the long-term impact of both a fixed-rate and a variable-rate mortgage would have made a huge difference.
I didn’t fully understand how these options could affect me years down the road—how a fixed-rate mortgage would give me stability, but with less flexibility, or how a variable-rate mortgage could start low but rise over time depending on market conditions. A mortgage broker would’ve helped me visualize the future with each option, helping me absorb all the factors I needed to consider, which would have made everything clearer and less overwhelming.
Don’t Hesitate to Reach Out to Me for Guidance
If you’re feeling uncertain about which mortgage is right for you, I want you to know that I’m here to help. As your mortgage broker, I will dive deep into your unique situation and provide you with personalized guidance tailored to your needs. I’ll make sure you understand every detail and give you the tools to make the best decision for your future, whether it’s about choosing between mortgage types or ensuring the loan you choose aligns with your goals.