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. Historically, you can expect a financial reward for choosing a variable rate, although the savings varies depending on the economic environment.
A variable-rate mortgage often allows the borrower 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.
Fixed-rate mortgages appeal to homebuyers who are looking for a dependable payment schedule, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income may be better off opting for the peace of mind that a fixed rate provides.
When do I lock in my variable rate?
There’s no one-size-fits-all answer to when the right time may be to lock in your variable mortgage to a fixed-rate product. If you’re considering locking in, your best bet is to talk to an independent mortgage professional so you can be advised on a decision that best meets your specific needs.
Also, be sure not to simply accept what a lender may be offering you as a lock-in rate. Again, it’s always best to have a conversation with an expert so that you don’t regret your decision once you’ve already locked into a rate.
Whether you’re already in a fixed-rate mortgage or you have a variable product and you’re considering locking in your balance, it’s important to understand prepayment penalties.
With many fixed-rate mortgages, the penalty can be quite substantial, especially if it’s early on in your mortgage term.
Many borrowers assume the penalty for breaking a mortgage amounts to three months’ worth of interest payments, which in the case for a vast majority of variable-rate products. But, with a fixed-rate mortgage, the penalty is the greater of three months’ interest or the interest rate differential (IRD).
The IRD calculation is what’s responsible for those huge penalties you hear about borrowers paying to break their mortgages. Penalties vary from lender to lender, however, and there are different penalties for different types of mortgages.
As a homebuyer, your best option is always to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage – including many other aspects of your mortgage that are just as important as rate in ensuring your money is maximized each month – so you can make an educated decision.
Have questions about whether you should opt for a fixed- or variable-rate mortgage product? Answers are just a call or email away!
*The postings on this site contain my own views and don’t necessarily represent the company’s positions, strategies or opinions.