The Learning Centre:
Is a fixed- or variable-rate mortgage better?
The answer may surprise you.
With a fixed rate mortgage, monthly payments remain constant so budgeting is easier and there’s no worry about rates increasing. With a variable rate mortgage, rates are usually lower, but could increase if your prime lending rate changes. But there’s more to the fixed vs variable rate mortgage discussion than just rate.
“There are a variety of items that should be taken into consideration when selecting a mortgage.” says Amedeo Perfetto, Director of Lending Services at Educators Financial Group. “Our Accredited Mortgage Professionals can help you choose the mortgage that is right for you.”
Fixed rate mortgages are a budgeter’s boon.
The good thing about a fixed rate mortgage is that it lets you plan. If the cost of your home will take a large part of your pay cheque … if you have a young family … if you’re just starting out and don’t have a lot of disposable income … knowing exactly what your monthly payment will be, and that it won’t go up, is not only a big advantage, it can be a necessity.
If you’re looking at variable rate mortgages, take the sleep test.
To determine if a variable rate mortgage is right for you, first consider this: can you afford an interest rate increase? Then, factor in your level of risk aversion. If you can’t sleep knowing that your rates could go up, a variable rate mortgage may not be for you.
If you choose a variable rate mortgage, one strategy to try is to fix your payment at a set amount higher than the minimum requirement or at the current five-year fixed rate. This way, you’ll have a buffer if rates rise, but you’ll also be taking advantage of the lower variable rate by allocating more of your payment to pay down the principal. If rates start to rise, you can lock in for at least the length of the remainder of your mortgage term.