According to a study done by Dr. Moshe Milevsky, Associate Professor of Finance at York University’s Schulich School of Business, 90.1% of the time Canadians will save money by choosing a variable rate mortgage. But what about the other 10%? They’re the ones who saved money by going with a fixed rate. Seems like the choice of “which rate is better” shines clear as day, but if you keep digging you might find it’s not as obvious as you’d think.
When mortgage shopping, many home buyers (especially first time buyers) often ask the question “will I benefit more from a fixed or variable rate mortgage?” First off, let’s go over what they are and what they can do for you. After we understand how they differ, we will be able to make a smart decision on which mortgage rate will fit your lifestyle.
Since this rate tends to be based upon a mortgage lender’s prime rate, it is subject to change on a monthly basis. Why is that? Because when the prime rate increases or decreases, so does your mortgage rate! That being said, you might be curious about what a prime rate is, so let’s look at the facts before we continue…
All About “Prime”
Prime is the key criteria for interest rates used by big banks when pricing out short term loans. It is influenced by the Bank of Canada’s overnight lending rate and can be manipulated on a monthly basis. These changes are often brought on by our current economic stance and over the last 25 years, prime has fluctuated by 1.23% each year.
Now that we are familiar with prime, we can look at the pros and cons of a variable rate mortgage whilst fully understand why these changes occur.
Typically lower interest rate than a fixed rate mortgage.
Penalty for breaking contract is only 3 months interest.
According t0 the study mentioned before, the average savings over 15 years was $20,630 per $100,000 borrowed.
Living with the fear of rising rates that could unexpectedly change your monthly payments.
Risk factor is often high, you might be paying $200 extra for your mortgage the next morning you wake up!
Prime rate will unmistakably be affected by the Bank of Canada’s overnight lending rate.
Moving onto fixed mortgage rates, we see a substantial form of security thanks to a predetermined rate set over a period of time. Budgeting your finances becomes a whole lot easier because of the established price on monthly payments. Of course, every rose has its thorn and there are both pros and cons to this type of rate as well.
Obviously the security! Every month your payment stays the same and there will be no surprises.
Low risk on your finances as you won’t be worrying that next month the payment is going to go up.
Given our current economy, fixed mortgage rates are at perpetual lows.
Higher interest is the detrimental trade off for sensible security.
Lenders may charge an arm and a leg as a penalty for breaking your contract. This is thanks to an “interest rate differential” which compensates for interest lost.
You are locked in for a number of years (ex. 5 years is often a popular fixed rate plan.)
We realize this may have confused you even more on which mortgage rate is better, but hopefully you now have a general understanding on the differences between them. Ultimately the choice is up to you and is largely dependant on your personal finances and fortitude going into a variable mortgage. If you’re the kind of person who values the protection within your monthly payments, then a fixed rate might be your better option. But if you’re willing to take a leap and trust that the Bank of Canada’s prime rate will be on your side, you might end up with a heap of savings.
However, it’s always a good idea to talk to a Kelowna mortgage broker as we can provide you with education and knowledge that will be tailored to your unique situation. At John Antle Mortgages, we want to arrange adaptable solutions with great rates and aim to alleviate the frustration that dealing with a bank might bring. If you’re interested in what we have to say about your decision on a fixed or variable mortgage rate then contact us today.
John Antle Mortgages – Kelowna’s Mortgage Specialist
We specialise in offering mortgage solutions that go above and ‘beyond the bank’. By this we mean we are able to provide flexible solutions at great rates, in fact our rates are often better than what traditional banks have to offer. The bank can be intimidating and even frustrating, working with a mortgage broker opens up your options and allows you to find a solution that works for your unique situation. We work with a variety clients including first-time buyers, those looking to transition from renting to owning, self-employed business people, as well as investors in rental and/or vacation properties.