Fixed Rate Loans Vs. Adjustable Rate

Variable rate mortgages continue to be one of the more controversial topics among homebuyers. I’m asked about them practically every day in fact. I can understand why, as variable rate mortgages do carry some strong advantages over fixed-rate mortgages.

Instead of turning this into a long commentary, I figured you’d benefit more from a good old fashioned pros and cons list. Sound good? Quick, simple, and to the point! Let’s start off with variable rate mortgages first: 

Advantages

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Usually lower than available fixed rates.
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You can enjoy falling rates without refinancing if rates drop. Instead of going through the hassle (And expense) of a refinance to benefit from a lower rate, your variable rate will drop all on its own – You just kick back and enjoy the lower payment!
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Save and invest the money you save. Let’s say that your payment is $100 a month lower with a variable rate vs. a fixed, why not put that extra cash into a high-yield interest bearing account? or use it to prepay your mortgage and pay it off faster.
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Enjoy lower payments.
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Cost to break the mortgage is 3 months simple interest.

Disadvantages

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If rates rise, typically, your payments will rise accordingly with your next scheduled payment or your amortization will be extended.
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The monthly increase can be a shock and make it difficult to budget for.

Fixed-rate mortgages

Advantages

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No concern over rate changes. As the name implies your rate is fixed the entire length of the loan.
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Certainty in payments makes budgeting decisions easier as there is no concern over future payment fluctuation.
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Easy to compare/shop. A plain vanilla loan program that allows you to compare overall costs across the board.

Disadvantages

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If rates drop, you cannot take advantage of the lower payments without the hassle and cost of a refinance.
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May not qualify for as much home as you would with a lower payment variable rate.
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Cost to break the mortgage could be considerable. Calculations vary from lender to lender, but it is usually the higher of interest rate differential or 3 months simple interest.

Hopefully the above gives you some things to think about. Here are some other important questions to consider before making your decision:

1. How long will you stay in the home?

If you’re going to be living in the house for just a few years, the lower-rate of the variable makes more sense. I’d recommend looking into 3 year variable rate product.

2. How frequently would the Variable adjust?

No way of knowing for sure as the variable rate is tied to the lenders’ prime rate, which is tied to the Bank of Canada overnight lending rate. This rate is adjusted periodically by the Bank of Canada and used as a tool to control inflation.

3. What are interest rates doing?

When rates are higher in a strong economy, a Variable rate mortgage makes more sense.  All economies cycle, if the economy is a peak performance, then the likelihood of rate increasing from there are smaller and the chances of rates decreasing are stronger. When rates begin to fall, borrowers will automatically benefit because payments will fall accordingly without the need for refinancing. When rates are low or the economy is in it’s growth phase, however, a fixed-rate mortgage often makes more sense.

Need help deciding which is the better option for yourself? Book a Free 20 Minute Strategy Session below and we will figure it out together.

Dominion Lending Centres Edge Financial
8 Sampson Mews, Suite 201 | Toronto | ON | M3C 0H5, FSCO #10710

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