Fixed Rate Mortgage vs Variable Rate Mortgage Pro’s & Con’s!
One of the first decisions homebuyers and mortgage shoppers face is whether to select a fixed-rate or variable-rate mortgage. Both have their own set of advantages and disadvantages, and it's important to weigh them carefully before making a decision.
What's the difference between fixed and variable rates?
With a fixed-rate mortgage, the mortgage rate and payment you make each month will stay the same for the term of your mortgage. With a variable-rate mortgage, however, the mortgage rate will change with the prime lending rate as set by your lender. A variable rate will be quoted as Prime +/- a specified amount, such as Prime - 0.45%. Though the prime lending rate may fluctuate, the relationship to prime will stay constant over your term.
Fixed Mortgage Rate
A fixed-rate mortgage is a mortgage with an interest rate that remains the same for the term of the mortgage. It is the most common type of mortgage chosen by homebuyers because of its predictable payments and stability. Fixed-rate mortgages are popular because they offer peace of mind and predictability. With a fixed-rate mortgage, you know how much you will be paying each month, which makes budgeting much easier.
Pros
- You can essentially 'set it and forget it', regardless of whether rates rise or fall.
- Eases budgeting anxiety and offers stability.
Cons
- If the difference between the variable and fixed rate is significant, it may not be worth paying a premium for the stability protection of a fixed rate.
Variable Mortgage Rate
A variable-rate mortgage is a mortgage with an interest rate that fluctuates based on the prime lending rate set by the lender. The prime rate is the interest rate that banks charge their most credit-worthy customers, and it is influenced by the Bank of Canada's overnight rate, which is used to manage the country's money supply.
Pros
- Examined historically, variable rates have proven to be less expensive over time.
Cons
- Consider the financial uncertainty: significant increases in the prime rate will increase your interest payable and, thus, financial burden.
Popularity of fixed versus variable mortgage rates
Fixed mortgage rates are historically the more popular of the two rate types. However, variable mortgage rates have become increasingly popular in recent years. In the second half of 2021, over 50% of new mortgages and mortgage renewals were variable-rate mortgages, and by the end of 2022, variable-rate mortgages accounted for 25% of Canadian mortgage debt. However, in the wake of successive rate hikes by the Bank of Canada between March 2022 and January 2023, variable mortgage rates went soaring and, consequently, variable mortgage rates plunged in popularity.
Comparing fixed and variable mortgage rates
When interest rates are low and are not expected to fall further, it is generally advised to lock in a fixed rate, as variables rates will, at best, stay the same, or increase. On the other hand, if you expect interest rates to fall with some certainty, then a variable rate is preferred, as you will be able to absorb the benefit of paying lower interest. Similarly, if the difference between the variable rate and the fixed rate is significant, it may not be worth paying the premium for the stability protection of a fixed rate.
Fixed and variable mortgage rate drivers
Fixed mortgage rates follow the pattern of Canada Bond Yields, plus a spread, where bond yields are driven by economic factors such as unemployment, export, and inflation. Variable mortgage rates are driven by the same economic factors, except variable rates fluctuate with movements in the prime lending rate, the rate at which banks lend to their most credit-worthy customers.
The choice between a fixed-rate and variable-rate mortgage depends on a number of factors, including interest rates, the economy, and your personal preferences. At Boychuk Mortgage Group - Mortgage Broker, our team of experienced mortgage brokers can help you navigate the pros and cons of each type of mortgage, and help you find the mortgage that best suits your needs.
Contact us today to learn more about our services and how we can help you with your mortgage needs.
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