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It's Your Money  

Should you choose a fixed or variable mortgage now that rates are high?

Fixed or variable mortgages

As interest rates in Canada continue to rise and show no signs of falling in the near future, Canadians looking to secure a mortgage are faced with an important decision: should they opt for a fixed or variable rate mortgage?

Both options have their advantages and drawbacks, and making the right choice requires careful consideration of one's financial circumstances and tolerance for risk.

Before delving into the decision-making process, let's briefly recap the differences between fixed and variable rate mortgages. A fixed rate mortgage offers a predetermined interest rate that remains unchanged throughout the term of the loan. On the other hand, a variable rate mortgage has an interest rate that fluctuates with changes in the prime lending rate set by the Bank of Canada.

Factors to consider include:

Rate stability—In an environment of rising interest rates, opting for a fixed rate mortgage provides the advantage of rate stability. By locking in a specific interest rate, homeowners can enjoy predictable monthly payments, making it easier to budget and plan for the long term. This stability can provide peace of mind, particularly for those with limited financial flexibility or risk aversion.

But will rates continue to climb or have they reached their peak? Nobody knows for sure but in my opinion, they must be near the top if not already there. And if they are, you may not want to lock in “at the top”? But if they’re not, locking in now may be better.

Flexibility and potential savings—Variable rate mortgages offer flexibility and the potential for savings. Initially, variable rate mortgages tend to have lower interest rates than fixed rate mortgages, which can result in lower monthly payments. Moreover, if interest rates were to fall in the future, homeowners with a variable rate mortgage could benefit from decreased mortgage payments.

Risk tolerance—Understanding one's risk tolerance is crucial when deciding between fixed and variable rate mortgages. Fixed rate mortgages provide security against future interest rate increases, but this protection often comes at a higher initial interest rate compared to variable rate mortgages. If homeowners can comfortably handle potential interest rate increases, or if they believe rates may fall in the future, a variable rate mortgage might be a suitable option.

Financial situation and long-term plans—Consider your financial situation and long-term plans when making this decision. If you anticipate a change in your financial circumstances, such as a job change, retirement, or growing family, a fixed rate mortgage may provide stability during uncertain times. On the other hand, if you plan to sell your property in the near future, a variable rate mortgage could allow you to take advantage of potential savings before the rate increases significantly.

Choosing between a fixed and variable rate mortgage requires careful evaluation of one's financial situation, risk tolerance, and long-term plans. In the current environment of rising interest rates, Canadians must weigh the benefits of rate stability against the potential savings offered by variable rate mortgages. While fixed rate mortgages offer predictability and peace of mind, variable rate mortgages provide flexibility and the potential for reduced payments if rates were to decrease.

Ultimately, the decision should align with individual circumstances and be made after consulting with a financial professional who can provide personalized advice based on your specific needs.

It is important to remember that the mortgage market is dynamic, and interest rates can change over time. Monitoring the market and staying informed about economic indicators can help homeowners make informed decisions and take advantage of favorable conditions when they arise.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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