“What is the difference between a fixed rate & carriable rate?”
This is one of the most common questions we are asked daily.
One of the hardest, yet most important considerations to make when buying your next home is whether to go with a fixed rate mortgage or a variable rate mortgage.
When deciding on what direction best suites you and your family, it’s important to first evaluate your risk tolerance, your future goals, and the pros and cons to both options in relation to how each align with your lifestyle.
Let’s take a deeper dive to each below.
- What Is a Variable Rate Mortgage?
- What Is a Fixed Rate Mortgage?
- What Causes the Variable Rate to fluctuate?
- How Much Would the Variable Rate Change?
- What are the Pro’s & Con’s to a Fixed Vs Variable Rate?
- A floating interest rate, also known as a variable rate or adjustable rate, refers to any loan that is not fully fixed, but rather shifts with any changes to the Bank of Canada’s overnight policy rate.
- There are two types of variable rate products:
- ARM – Adjustable-Rate Mortgage AND
- VRM – Variable Rate Mortgage
- When deciding on what variable rate product works best for you and your family, it’s best to ask yourself if you are more comfortable with a fixed monthly payment or paying your mortgage off on the agreed upon amortization. (See our variable rate mortgage section for more)
- While both options are great products, not every lender will offer both. Depending on the lender, some will have a variable rate mortgage product, while others have an adjustable-rate mortgage product. Speak with one of our team members today to learn more about which product is best suited for you.
- Within a fixed rate mortgage, you will have the security of knowing that your mortgage payment and interest rate will not change throughout the contractual term. In exchange for a fixed rate term, your lender will apply a higher pre-payment penalty should you decide to switch lenders, refinance, or reconstruct your mortgage before your mortgage term is up.
- The Bank of Canada meets 8 times each calendar year to analyze the Canadian economy and to decide on whether they should lower the overnight rate, raise the overnight rate, or keep rates neutral.
- At these meetings, the BoC will also announce any policy changes or updates that would otherwise affect the general Canadian economy.
- Historically, the government does not make changes to the overnight rate when they meet.
- Over the past 10 years, we’ve seen the variable rate stay fairly flat, with minimal fluctuations.
- If you have a mortgage today, your payment will change approximately $12 - $13 for every $100,000 that you owe on your mortgage.
- So, if you have a mortgage balance of $500,000, and the Bank of Canada changes their overnight rate by 0.25% - that will be an increase / decrease of about $60 to your monthly payment. Note, a typical increase made by the BoC is usually 0.25%.
- If your interest rate were to double – that would mean your payment would increase by 25%.
- If your interest rate were to triple – that would mean your payment would increase by 45%.
- A 1.5% increase in annual income is enough to cover a doubling in rates or in other words a 25% increase in your monthly payment 5 years later (income taxes included)
- A 3% increase in annual income is enough to cover a tripling in rates or in other words a 45% increase in your monthly payment 5 years later (income taxes included)
- Fixed Rate Mortgage Pro’s
- Fixed rates give the borrower the certainty of a static payment each month.
- In a rate rising environment, your payment will not move.
- Fixed Rate Mortgage Con’s
- Fixed rates are less flexible & result in larger penalties if you break your mortgage
- Once you choose a fixed rate mortgage, you cannot move over to a variable
- Variable Rate Mortgage Pro’s
- Variable mortgages will provide borrowers with the most flexibility.
- A variable mortgage payment may go up, but it can also go down
- A variable mortgage rate is typically offered at a lower rate than fixed
- The variable rate mortgage has historically outperformed the fixed rate mortgage
- Borrowers can qualify for more typically in a variable mortgage
- Once you choose a variable rate mortgage, you move over to a fixed anytime
- Variable Rate Mortgage Con’s
- A variable mortgage payment may go down, but it can also go up
- Variable rates are a little more complex as the rate is based off of the prime rate