fixed vs variable

Fixed vs Variable Rates Today

As you may have noticed, rates have been increasing due to inflations. This leads people to go back and forth with if they should go with a fixed rate or a variable rate. In this blog, we will go through both rates and which rate would be best suited for what your plans will be.

Fixed Rates

A fixed mortgage rate stays the same throughout the entire term of your mortgage. Generally, fixed rates may have a higher rate than a variable rate would have. Seeing that the rates are increasing, you may want to have a more secure rate, this way it ensures that you will avoid any rate increases in the future. A few advantages when going with a fixed rate:

  • Your monthly payments stay the same throughout your term
  • Your interest rate stays the same

Historically, variable rates have paid off for Canadians over time, as a variable-rate mortgage often allows you to take advantage of lower rates as the interest rate is calculated on an ongoing basis at a lender’s prime rate minus a set percentage. Still, many conservative borrowers would rather pay more for the security of a fixed rate option than must worry about the fluctuation of a variate rate alternative.

There’s no doubt that the five-year fixed-rate mortgage is the most common choice selected by Canadian homeowners. But this isn’t the best option for everyone, regardless of its popularity. Your decision should be based on your tolerance for risk as well as your ability to withstand increases in mortgage payments. This is where our expert support is even more invaluable.

Variable Rates

A variable rate is slightly lower than a fixed rate in most cases. One of the major risks to a variable rate is that your monthly payment will increase due to the fluctuations. This also means that your rate will most likely change with these inflations. A couple reasons why a variable rate might be the best fit for you:

  • You’ll have a flexible budget and feel comfortable with fluctuating interest rates
  • You want to pay mortgage off quickly

About 70% of all mortgage holders across Canada currently have a fixed mortgage rate. This is not because it’s the best choice – it’s often because it’s the safest option. Historically, variable-rate mortgages have proven to save borrowers the most money over time as part of a longer-term mortgage strategy.

A variable interest rate can increase and decrease over the whole duration of your term. If you choose a variable interest rate, your rate may be lower than if you selected a fixed rate.
There are two types of variable mortgages:

  • Variable rates with Adjustable payments
  • Variable rates with Fixed payments

Fixed payments with a variable interest rate
Under this option, the payment remains fixed over time despite variations of the interest rate.
If the interest rate goes up, more of your payment goes towards the interest, and less to the principal. If the interest rate goes down, more of your payment goes towards to the principal.

Adjustable payments with a variable interest rate
With adjustable payments, the amount of your payment changes if the interest rate changes. A set amount of each payment applies to the principal. The interest portion changes as the interest rates change. You’ll know in advance how much of the principal you’ll have paid at the end of the term.

It’s important to differentiate between the word’s ‘term’ and ‘amortization’. The ‘term’ refers to the duration of your current rate, whereas your ‘amortization’ is the length of time it will take to completely pay off your mortgage.

It is VERY important to have a clear understanding of the implications when it comes to deciding for a fixed or variable rate, and how it can affect you. It makes all the difference in future planning and can impact you in very significant ways.

At GLM Mortgage Group, we know what questions to ask. We have relationships with the lenders that you know about and the lenders you don’t. We would be pleased to educate you on the financial options available to you. We want you to make the best decision possible on the mortgage that you are committing to. Call us anytime for a FREE consultation on the mortgage products available to you.