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Are you better suited for a fixed or variable-rate mortgage?
How can you choose between a fixed or variable-rate mortgage? This is one of the biggest decisions you will make as a home buyer when you are considering your mortgage options. Both paths offer certain advantages and disadvantages, so it’s important to understand the details of each one to determine which one is best for you. Your mortgage broker will also be by your side throughout this process, but it will benefit you to do some research of your own as well. This will help you feel more confident and knowledgeable about your mortgage. Here’s a quick breakdown!
Fixed-rate mortgage products
A fixed-rate mortgage product has an interest rate that will remain the same throughout your mortgage term. When you sign your mortgage, you are signing onto a mortgage rate that will not change before your renewal, even if interest rates shift.
Pros
Fixed-rate products offer several benefits to borrowers. One of the top advantages is the stability of payments. Since you will always be working with the same interest rate, your monthly payments will remain the same. This makes it much easier to budget, and can be less stressful when planning for the future. Another major draw is the fact that you will be protected against economic fluctuations, which ties into the previous point. During periods of high inflation, interest rates can spike. If you have a fixed-rate product, you will not have to worry about this, which is a huge benefit for people who do not have as much financial flexibility. Finally, many people find fixed-rate products bring them peace of mind and take their mind away from mortgage-related financial concerns. This can be great for first-time buyers in particular, who do not have as much market experience.
Cons
Of course, fixed-rate mortgages have their limitations too. Fixed products are more rigid and have harsher penalties for breaking your term. If you choose to refinance, for example, you will likely experience a much bigger fee than a person who breaks a variable-rate mortgage term. Plus, while you will not have to take on a higher rate if interest rates rise, the opposite is also true. This means that should rates fall, you won’t be able to benefit from them. All in all, fixed-rate products are very structured, which can be both a blessing and a drawback.
Variable-rate mortgage products
Variable-rate products fluctuate alongside lending rates, which are set by the Bank of Canada. There are two types of setups for a variable-rate mortgage. With some lenders, if interest rates rise or fall, borrowers with a variable rate will experience higher or lower mortgage rates and payments as a result. With other lenders, payments will stay the same, but your amortization period is adjusted, which represents the time it will take to pay off your mortgage. Depending on market conditions, borrowers may save or spend more money with a variable product.
Pros
The big reason people choose a variable-rate product is so they can take advantage of interest rate decreases. During periods of low rates, monthly mortgage payments will also be lower, allowing for more savings. This can make for easier market entry. Plus, in the event of a refinance, the penalty for breaking your term is less severe. It typically equals three months of interest, which is often lower than the penalty fixed-rate borrowers face in the same situation. This allows you to take advantage of favourable products and options with less financial risk.
Cons
What are the downsides to variable-rate products? One of the largest drawbacks is the financial uncertainty. Since your rate depends on market fluctuations, your payment and amortization can change in either direction, which can be stressful. It can be much harder to budget with a variable rate, because you cannot always predict what your payments will be. People who dislike uncertainty, or cannot comfortably handle the risk of rate hikes, may feel more stressed if they choose this route.
So, which product is right for you? At the end of the day, you need to decide which path matches your needs better. You should consider your financial stability and budget, willingness to take on risk, and how much you value flexibility or structure. Of course, current market trends will also play a role, and that’s where a mortgage broker comes in! We can work with you to determine how your needs fit into today’s market. Using a broker is the best way to ensure you find the product and lender that are truly right for you.
If you have any questions about your mortgage, give us a call at Centum Home Lenders! You can reach us at 506-854-6847, or get in touch with us here.