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  • Writer's pictureDave Fullerton

Choosing Between Fixed and Variable Rates

How much do you know about mortgages? Many people think they're the same, but they are pretty different.

Fixed-rate mortgage interest rates stay stable for an entire year. In contrast, variables can go up or down based on market conditions like inflation and unemployment levels in different countries. So before making such important decisions that will affect your whole life - find out what kind (or "type") of loan is right for you.

The Case for Variable Rates

Many Canadians shy away from the option of a variable mortgage because of the potential risk of rate increases. However, while there is always a risk of interest rate fluctuations, this concern may be less of a factor than you think. There are other reasons to consider a variable rate mortgage.

Many Canadian economic experts believe that a mortgage rate that varies with fluctuations in the bank’s prime rate will offer the most significant advantage regarding long-term savings on interest costs.

Examining Canadian mortgage rate data from 1950 – 2007, Dr. Moshe Milevsky, Associate Professor of Finance at York University, found: Choosing a variable rate mortgage would have saved Canadians $20,000 in interest payments over 15 years (based on a $100,000 mortgage).

Essential factors to consider about variable rates include,

  • Canadians are often better off with a variable rate mortgage than a fixed 89% of the time.

  • Regular payments are set for however long you're locked into that deal, even though interest rates may fluctuate during your term.

  • When rates go down, an increased amount of your payment goes to pay the principal. With more going into your principal, you pay less interest and the faster the mortgage is paid off.

  • When rates go up, you’ll see an increase in the portion of the payment that goes into paying the interest. With less going into the principal, the amortization period is extended.

  • Typically, variable rates include some of the lowest rates available.

  • Variable rates allow you to change your mind at any time and go with a fixed-rate mortgage for as long of a term that works best.

The Case for Fixed Rate

Why choose a fixed-rate mortgage? Fixed rates offer the stability of knowing your interest rate for all sessions and throughout each term. Why take chances with fluctuating market prices when you can have peace of mind about what will happen next year or five years from now.

The main advantage of selecting a fixed-rate mortgage is that you can depend on an interest rate that stays relatively stable during the term. The downside is that you can’t take advantage of a lower interest rate — and the ability to have more of your payment go towards the principal and less to the interest rate — if interest rates drop during your mortgage.

Bottom Line

If you want to buy a property, there's no better time than now. With low-interest rates and lots of competition in the market right now, it will be hard for any potential buyer not to take advantage.

However, before deciding which mortgage interest rate would suit you best, we want to help ensure that your loan meets your current financial situation.

Let us help you by contacting us today.


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