INTEREST RATES - FIXED VERSUS VARIABLE

So which rate is better?

A fixed rate is where the interest rate is fixed for a specific period of time. Generally known as the mortgage term, the average term is 5 years. As time goes on, more of the mortgage payment goes towards the principal and less of the payment goes to the interest. A variable rate is where the interest rate fluctuates with any changes in the prime rate. The prime rate is set by each lender independently, and typically follows the pattern of the prime rate set at The Bank of Canada. The variable rate will always be based on prime plus or minus a discount. For example, prime minus 50 would be whatever the prime rate is minus 0.50%. If prime is 3.00%, then this variable rate would be 3.00 - 0.50 = 2.50%. This rate is always subject to change, and will fluctuate.

Determining which one is better is as simple as looking at your ability to handle risk, if you dont like to take risk then you should take the fixed rate. This will give you the peace of mind of knowing what your payments will be over the term of the the mortgage.

Here’s an easy test…
If you loose sleep worrying about the possibility of a .25% increase in the interest rate or get stressed thinking about the impact on your monthly budget if your mortgage payment changes, then a fixed rate mortgage is for you.

Another point to keep in mind is that most mortgages will allow you to choose a variable rate, and will let you lock in to a fixed rate at any time throughout the mortgage. There is no cost to do this.

Currently the variable rate is low, however so are the fixed rates. Granted the variable rate is lower, but the fixed rate is even more attractive to those risk adverse clients who will still get a good deal compare to previous fixed rates in the past.

The decision to choose a Fixed or Variable Rate mortgage is as personal as choosing the home that's right for you. Feel free to ask us for more details and we can help you make the right decision.

Do you have something to say? Feel like leaving your two cents on this topic? We would like to hear your opinion, please comment below.