Mortgage Blog

What is a fixed and variable rate mortgage?

A fixed-rate mortgage is a loan where the interest rate stays put throughout the entire loan journey, no surprises – it’s like that reliable friend who never changes plans. It's different from those other loans that can play the "adjust or float" game with interest rates. In Canada, fixed-rate mortgages typically come with terms ranging from 6 months to 10 years, with the most common terms being 1, 2, 3, 4, and 5 years.

A variable-rate mortgage is a loan where the interest isn't set in stone. As interest rates fluctuate, so does your mortgage rate. Keep in mind, your principal amount stays fixed; it's only the interest rate that might go up and down.

Sometimes, variable-rate mortgages in Canada often come with interest-rate caps. These caps set limits on how much the interest rate can increase over the entire term of the mortgage. These caps help protect borrowers from sudden and drastic increases in interest rates, adding a level of predictability to variable-rate mortgages and mitigating the potential downsides of market fluctuations.

Benefits of a fixed rate mortgage

Fixed-rate mortgages offer several advantages that can be enticing to people like you and me. These include, but are not limited to:

• Budgeting with Payment Stability – Many folks go for fixed-rate mortgages because it keeps things simple and steady. When your interest rate stays the same, it makes budgeting and planning for your financial future a breeze!
• Protection Against Interest Rate Increase – Fixed-rate mortgages protect borrowers against rising interest rates. Once you lock in fixed rate, you are shielded from the impact of interest rate hikes.
• Long-Term Financial Planning – Fixed-rate mortgages are suitable for those who prefer long-term financial planning. The stability in payments allows homeowners to focus on other aspects of their financial goals without worrying about payment volatility.
• Fixed-rate mortgages are best for those who value financial certainty and peace of mind, making homeownership more secure.

Disadvantages of a fixed rate mortgage

Be leery, fixed-rate mortgages do present disadvantages as well. These include, but are not limited to:

• Higher Initial Interest Rates – Fixed-rate mortgages often start with higher interest rates compared to the initial rates of variable-rate mortgages. This can result in higher monthly payments, especially when interest rates in the market are relatively low.
• Limited Potential for Rate Decreases – If market rates decrease after you’ve locked in a fixed-rate mortgage, you won’t benefit from the lower rates unless you refinance, which involves additional costs and requalification criteria.
• Potential for Higher Total Interest Payments – Over the life of the loan, you might end of paying more in total interest compared to someone with a variable-rate mortgage if market interest rates remain low or decrease. As a result, you could miss out on potential savings.

Overall, it I best to assess your living situation and 5-year plan to determine whether a fixed-rate mortgage is best for you!

Benefits of a variable rate mortgage

Are you considering a variable-rate mortgage? Here are some advantages to consider!

• Potential for Lower Initial Rates: Picture this - at the start, variable rates often kick off lower than those fixed-rate counterparts. It's like catching a boxing-week sale on your mortgage interest.
• Possibility of Savings in a Falling Rate Environment: If the market decides to drop interest rates, you could snag some serious savings.
• Flexibility in Rate Changes: Variable-rate mortgages often come with adjustable terms. That means if market conditions change, your mortgage can adapt. It's like having a mortgage that's got some moves.
• Potential for Faster Principal Repayment: With lower initial rates, more of your payment can go towards the principal. It's like turbocharging your journey to mortgage freedom.

Remember, variable-rate mortgages fluctuate often, but the potential for advantages can make it a very tempting option.

Disadvantages of a variable rate mortgage

When interest rates are low, variable-rate mortgages are a very tempting option. However, they do offer disadvantages as well. Let’s talk about the not-so-glamorous side:

• Interest Rate Uncertainty: The big one - the interest rate can play the unpredictability card. It's like not knowing how to dress for autumn weather in Canada.
• Potential for Payment Increases: If market rates decide to dance upwards, so does your mortgage rate. This could mean higher monthly payments.
• Budgeting Challenges: With fluctuating rates, budgeting can be a bit difficult. It's not impossible, but it’s harder.
• Risk of Higher Total Interest Payments: If rates decide to party on the higher side for a while, you might end up paying more in interest over the life of your mortgage compared to a fixed-rate scenario.

It's important to weigh the potential downsides against the advantages and your own risk tolerance.

Should I choose a fixed or variable rate mortgage?

The decision between a fixed-rate mortgage and a variable-rate mortgage hinges on various factors. Opt for a fixed-rate mortgage when stability is your top priority. If you value the comfort of knowing your interest rate remains constant over the entire loan term, this option provides a sense of financial security. It's an ideal choice in a low-interest rate environment, safeguarding you from potential rate hikes in the future. Additionally, if you are risk-averse, prefer a predictable monthly budget, or plan for long-term homeownership, a fixed-rate mortgage aligns well with these preferences.

On the flip side, consider a variable-rate mortgage when you are comfortable with some level of risk and anticipate potential interest savings. Variable rates can be lower initially, making them attractive when market conditions are favourable. This option is suitable if you have a higher risk tolerance, believe interest rates will remain stable or decrease, and are open to adjusting your budget in response to rate fluctuations. Variable-rate mortgages also provide flexibility for those who may plan to sell or refinance in the short term.

Ultimately, the choice depends on your unique financial goals, risk tolerance, and your outlook on interest rate movements.

Don’t know where to get started?

If you don’t know where to start, CENTUM is by your side. Reach out to us today! We’re experts on fixed and variable-rate mortgages!