Learn the Difference between Fixed and Variable Rate Mortgages in Ontario
When shopping for a mortgage, the terms used to describe the different options available can be very confusing. One of the most common questions your ReferralMortgages.com team answers for clients is the difference between fixed and variable rate mortgages and which option is better. We have broken things down to try to help you make the best decision for your situation.
Fixed Rate Mortgages
As the name suggests, a fixed rate mortgage has an interest rate that does not change during the term of your agreement. One drawback to this type of mortgage is that the interest rate charged is usually slightly higher than other available options. If interest rates drop during your contract, you will not see any benefit, but if interest rates rise, your rate remains locked in until it is time to renew. If you are working with a strict budget and want to know exactly what your mortgage payment is from month to month, negotiating a fixed rate mortgage at an interest rate you can live with is the best option.
Variable Rate Mortgages
The variable rate mortgage option is based on the prime lending rate plus a percentage. As interest rates rise or fall, the amount applied to your principal changes accordingly. When you consider the principal amount of a mortgage, even a decrease of 0.5% can make a difference over several payments. Conversely, if interest rates rise, the amount applied to the interest portion of your mortgage will go up as well. Ultimately, variable rate mortgages are based on the principle of risk vs reward. If you are willing to risk the rise and fall of interest rates, you receive the reward of potentially paying less interest over the term of your agreement.
Maximizing the Benefits of a Variable Rate Mortgage
With interest rates at historic lows, you might think a variable rate mortgage is your best option. One thing to consider however is that interest rates will rise. To maximize the benefits of a variable rate, ask your ReferralMortgages.com agent about your prepayment options and learn how much extra you can pay towards your principal each year without penalty. Once that is established, determine a comfortable mortgage payment that is higher than the minimum required, but still within your allowable overage. This way, more money will be applied to the principal borrowed and even if interest rates do rise, you will pay less over the long term. If interest rates are on an upward trend during the term of your mortgage and you are uneasy, you can opt to lock in at the current rate for the remainder of your agreement.
Your ReferralMortgages.com team understands that choosing between fixed or variable rate mortgages can be difficult. When you work with us to secure a mortgage, we will assess your personal situation and help you with recommendations that work best for you. Contact us today to learn more about your options.