Fixed Mortgage or Variable Mortgage?
In the past couple of years, we have enjoyed all-time low interest rates and now the financial landscape is changing somewhat with recent Bank of Canada interest rate increases. We saw many Canadians opting for variable mortgage rates and some are now asking if they should covert to a fixed mortgage with many financial experts forecasting of interest rates to increase even more over the rest of 2022. For some, having the peace-of-mind of a fixed mortgage payment amount could be appealing as they can plan their monthly home expenses and not be concerned about the mortgage payment amount changing should there be a rate increase. Let’s take a quick look and some things to assess as you consider such a move.
Variable Mortgage
With a variable mortgage, your monthly payment (and interest) is dictated by the prime rate that is set by The Bank of Canada. Simply put, when the prime rate is lowered, your monthly payment can be reduced and when an increase to the prime rate is announced, then you’ll also be subject to an increase for your monthly mortgage payment amount. We see that many Canadians like the security of a fixed mortgage payment historically, however a variable mortgage plan that is planned properly could present an opportunity to save thousands in interest charges over the life of the total mortgage. With these monthly savings, an individual could potentially use the funds to invest in other properties, markets or financial projects. Another thing to consider is the monthly payment difference when comparing a fixed mortgage versus a variable mortgage and using that to pay down the mortgage quicker. For this consideration, let’s say the monthly payment for a variable mortgage is $1900/m but on a fixed mortgage it is $2000/m, which would leave $100/m difference. A homeowner may want to use that $100/m to top up their variable payment every month to bring it to the same rate as the fixed mortgage would have been. If the rate increases, the homeowners as the option to keep paying the extra $100/m or to remove that to offset the monthly increase.
Fixed Mortgage
For those wanting to have the assurance of a set mortgage payment amount for the term of their contract, a fixed mortgage provides just that and another reason why it’s preferred by so many Canadians. The original monthly payment amount will still be intact for the entire term until the renewal regardless of the prime rate increasing or decreasing along they way. For example, if your total monthly payment was $2000 @ 2% approved rate on day one, it will be the same on the final day of, let’s say a 5-year term even though the interest rate at that time may be 2.5%. Any changes to the monthly amount would only apply at renewal time for the next term length. On the flip side, if the interest rate drops down to 1.5% on that same contract, then the homeowner can’t take advantage of the lower rate to bring their monthly payment down as fixed mortgage contracts are not as flexible for quick changes and subject to higher penalties usually.
What’s a better way to go, Fixed Mortgage or Variable Mortgage?
All family finance models are unique from each other and the profile of the homeowner is also different for each. Meaning, one individual might be more of an investor type and can handle fluctuating payment amounts whereas the other may not want that exposure and play it safer to lock in an amount they are comfortable with. That being said, it’s a good idea to meet with a mortgage broker for a proper assessment and learn more about the types of mortgage products and the various lenders that could be a good match for your personal financial picture.
This is just a quick overview of the question I get asked with almost every client. For your personal mortgage planning, I invite you to connect with me at anytime to start the planning process for a peace-of-mind mortgage solution designed to help you enjoy our next home!
All the best,
Sukh Sangha