Hey there, young homebuyers! Are you considering getting a mortgage and wondering if you should go for a fixed or variable rate? Well, let me tell you, it's not crazy to consider a variable rate in today's market!
Let me break it down for you. A variable-rate mortgage can offer you lower interest rates and more flexibility. Your mortgage rate is tied to the prime rate, which can change based on factors like the Bank of Canada's overnight rate, inflation, and economic growth. If the prime rate drops, your mortgage rate drops too, which means you'll pay less interest. Plus, if your financial situation changes, you can adjust your budget with a variable-rate mortgage. And, if you want to lock in your rate, you can switch to a fixed-rate mortgage at any point during your term.
We have explored the general benefits to a fixed rate mortgage, but wanted to show a scenario with today’s rates and industry numbers. Currently fixed rates are generally lower than the variable rate on mortgages today in Canada. For example;
Fixed with a 5 year term = Monthly Payment - $2147
Variable Monthly Payment - $2355
With this scenario,
there are two important things to note. 1. With a fixed rate you are locked into the rate for the entire term. Your payment is $2147/month for 5 years. 2. The variable rate is currently over $200 more a month, however, as prime fluctuates over the 5 years, so does your mortgage payment.
If prime was to head south in the range of pre-pandemic numbers, your monthly payment would be $1962, which would be saving you money each month. That being said, it is hard to bank on the numbers. It is best to do what feels right from a risk perspective for you and your family.
*Above numbers are hypothetical and for illustrative purposes only. This is not a commitment to lend, pre-approval or approval.
Now, I know you might be worried about the risk of interest rate increases with a variable-rate mortgage, but hear me out. If you break your mortgage early, the penalty with a variable rate mortgage is usually three months of interest, whereas, with a fixed rate mortgage, it can be much higher. Plus, fixed rates are generally lower than variable rates right now in Canada, but as prime fluctuates over the years, so will your mortgage payment.
So, a variable rate mortgage can be a great choice for those who value flexibility and can sleep at night knowing rates might change. Just remember, it's important to consult with a mortgage professional to determine if it's right for you and to understand the risks and benefits associated with this type of mortgage. Don't be afraid to ask questions and get all the information you need to make an educated decision.