You have a choice to make whether you’re preparing to apply for your first mortgage (congratulations! ), renewing your mortgage, or both. There are many factors involved when deciding between fixed-rate and variable-rate mortgages. Your personal financial situation, your level of risk tolerance, and the overall state of the economy To assist you in selecting the mortgage that best suits your needs, we explain the distinctions between fixed-rate and variable-rate mortgages.
Fixed-rate mortgages have payments that do not change during the mortgage term. Your payments for
can change over the course of your mortgage. Adjustable-rate mortgages can increase or decrease in tandem with broader interest rates.
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What’s a fixed-rate mortgage?
The name says it all. A fixed-rate mortgage has a fixed interest rate for the duration of the loan. Your term is the length of your mortgage contract. It can range from a couple of months to ten years.
Fixed-rate mortgages are generally more expensive than variable-rate mortgages, but they are a better choice if:
Given how low interest rates currently are, you want to lock in your rate and prevent any potential future increases.
Regardless of market fluctuations, you would prefer to plan for predictable and consistent payments, typically with the same principal-to-interest ratio.
What’s a variable-rate mortgage
A variable-rate mortgage fluctuates depending on the prime rate of your financial institution. The prime rates vary mainly according to the key interest rate issued by the Bank of Canada. Variable-rate mortgages are adjusted each month to reflect these fluctuations. It’s an interesting choice if:
A capped variable rate will fluctuate with market conditions but never go above a cap set when you take out a mortgage. With this choice, you can benefit from rate reductions while avoiding rate increases. You should be aware that this type of rate typically carries an additional premium.
Fixed payments with a variable-rate mortgage
With a variable-rate mortgage, some financial institutions will offer fixed monthly payments. How does this work? You pay more principal and less interest if your interest rate decreases, and vice versa if it increases. Your financial institution will get in touch with you to adjust your mortgage payments when rates reach a certain percentage.
Are variable rates and fixed payments the best of both worlds?
Not necessarily. Rate changes will have an effect even if your payments are fixed when it comes time to renew your mortgage. To maintain the same amortization period, you might need to increase your monthly payments. Or, to maintain your lower payments, you’ll need to refinance your mortgage and lengthen your amortization.
Variable-rate mortgages are often the best choice
Many economists believe that, on average, variable-rate mortgages are preferable to fixed-rate mortgages in the long run.
Nevertheless, bear in mind that your best course of action will depend on your risk tolerance, personal finances, and the state of the economy. Like all financial products, each case is unique.
What’s a hybrid or made-to-measure mortgage?
Fixed-rate and variable-rate mortgages are combined into one loan in a hybrid or made-to-measure mortgage. The idea is simple: Divide your mortgage into segments. These segments each have unique traits, such as term, interest rate, etc. In this manner, you can secure a portion of your loan with the benefits of a fixed-rate mortgage while receiving the benefits of a variable-rate mortgage for the remainder.
What causes mortgage rates to change?
As mentioned earlier, a variable mortgage rates fluctuates depending on the prime rate of your financial institution. Prime rates vary mainly according to the key interest rate issued by the Bank of Canada. Basically, if the key interest rate increases, so do variable-rate mortgages.
According to the state of the economy and inflation, the benchmark interest rate is changed. The key interest rate will be higher to combat inflation the stronger the Bank of Canada anticipates both inflation and the economy to be in the coming months.
The prime rate can occasionally fluctuate between times when the key interest rate changes, despite being closely correlated with it. As an illustration, the prime rate might rise in anticipation of potential future increases in the prime interest rate.
Long-term rates on Canadian government bonds have an impact on fixed mortgage rates. For instance, five-year fixed mortgage rates differ from five-year Canadian bond rates. The stock market, which is impacted by long-term economic and inflationary forecasts, moves in tandem with changes in bond rates.
What do I do if interest rates decrease?
If rates are unusually favorable or if a significant rate reduction is anticipated, you could:
If your loan doesn’t mature for a while, use your calculator with caution:
What do I do if interest rates increase?
We understand that when a rate increase is announced, you immediately wonder how it will affect your mortgage payments. If you have a variable-rate mortgage or renewal coming up, an increase could have an immediate impact on your payments.
Here are a few options, in case interest rates rise, before you take any drastic actions:
Policy interest rate hike: are you informed? Learn more about policy interest rate hike and its financial impacts.
Now let’s apply theory to practice and determine how well you can handle monthly payments that fluctuate. Here are some mortgage planning resources to assist you in creating a sensible annual budget and forecasting costs for a first-time home buyer:
A mortgage pre-approval can help you lock down a good mortgage rate against potential increases while you’re looking for a home, giving you peace of mind. By confirming your borrowing capacity, it will also facilitate the buying process for you, especially when it comes to making an offer to buy.
The decision between a fixed or variable rate will depend on the economic environment, your budgetary flexibility, and, most importantly, your risk tolerance. This is true for any financial product that is subject to market fluctuations. We are available to respond to your inquiries and would be happy to assess your particular situation.
Would you like to discuss this with us? Contact your National Bank advisor or your wealth advisor at Financial National Bank for more info. Dont have an advisor? Schedule an appointment in just a few minutes.
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FAQ
Is a mortgage variable?
A type of home loan where the interest rate is not fixed is a variable rate mortgage. Instead, interest payments will be modified at a rate that is higher than a particular benchmark or reference rate, such as the Prime Rate plus 2 percentage points. Over the course of a mortgage loan, lenders may provide variable rate interest to borrowers.
How do I know if my loan is fixed or variable?
An outstanding balance on a loan with a variable interest rate fluctuates in accordance with an index or benchmark that is used as the underlying measure. A loan with a fixed interest rate is one in which the interest rate is fixed for the duration of the loan.
Are most mortgages fixed rate?
Most mortgages are fixed-rate loans. The primary advantage of fixed-rate mortgages is that their payments are generally predictable. For as long as you have the loan, you will make the same amount in principal and interest payments each month.
Are UK mortgages fixed or variable?
Mortgages in the U. K. typically have fixed terms of only two or five years. Mortgage holders have two options after the fixed rate expires: they can refinance into a new fixed rate loan or pay the “standard variable rate.”