Fixed or variable mortgage?

If you are looking to buy a new home, refinance your current mortgage to access equity or your mortgage is up for renewal you may be trying to decide whether you should go with a fixed rate mortgage or a variable rate mortgage.

What is the best option? It’s really up to you but make sure you make that decision with all of the information as there are significant differences between these two types of mortgages.

The biggest difference is how the prepayment penalties are calculated. Statistics show that the average mortgage is broken at the 38 month mark despite most banks promoting five year fixed term mortgages so odds are you are going to break your mortgage early.

The maximum amount of interest penalty on a variable rate mortgage is three months interest whereas a fixed rate mortgage penalty is either the interest rate differential or three months interest whichever is higher and sometimes, depending on the lender, the interest rate differential penalty can be very high.

A variable rate mortgage is based on the Bank Prime Rate, which is what financial institutions charge to consumers. Bank Prime is based on the Central Bank Rate (the amount of interest the Bank of Canada charges financial institutions for short term loans).

As the Central Bank Rate increases or decreases, so does Bank Prime and in turn the variable rate along with Home Equity Lines of Credit, Student Loans, etc. All indications are that this rate will stay low well into next year.

A five-year fixed rate mortgage is based on the bond market. As the bond market increases or decreases so does the five-year fixed rate.

A number of years ago, it was clear that going with a variable rate mortgage would save consumers money. But heavy discounts on fixed rate mortgages and the narrowing spread between short-term and long-term interest rates have made the choice today less obvious.

Instead of trying to guess where rates are headed, consumers would do better to think about their own situation. They should evaluate their personal balance sheets and risk tolerance.

The decision of whether to go short (variable) or long (fixed) will depend on the consumers’ tolerance for risk as well as their ability to withstand possible increases in mortgage payments.

The first time home buyer or those with minimal down payment represent the perfect consumer to go with a long-term fixed mortgage rate. 

Something to keep in mind is that variable rate mortgages allow consumers to lock in to a fixed rate at any time without costs. While there’s no up-front cost to the change, not all lenders will lock in at the fully discounted rate.

Consumers should be sure to ask their lender if they will get the same fully discounted fixed rate if they decide to lock in when you first take out your mortgage.

There are many lenders available through mortgage brokers that will offer their best discounted fixed rates should you decide to lock-in. An important consideration if you have a variable rate mortgage.

I generally place my clients with non-bank lenders that do not have a posted rate if they choose a variable rate mortgage.

If they decide to lock-in at some point during the term of the mortgage the best fixed rate mortgage will be offered unlike a bank lender where the locked in rate may not necessarily be fully discounted.

Your goal for your mortgage should be to pay the least amount of interest as possible so if you need to break your mortgage a variable rate mortgage generally will cost you less.

So the answer to whether you should take a fixed rate mortgage or a variable rate mortgage – It depends!

If you are at your maximum purchasing power or you’re a worrywart, lock-in, forget about it, and enjoy life.

If you want to take advantage of the many strategies that are available to maximum the current low rates available on a variable rate mortgage, please give me a call at 1-888-561-2679 or email [email protected] and we can review your personal circumstances. 

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