Fixed Rate or Variable Rate Mortgage...which is right for you?

When exploring homeownership, one of the decisions you will make is the type of mortgage to choose. You can choose either a fixed-rate mortgage or a variable-rate mortgage, each with distinct advantages and challenges that can greatly impact your financial future. We'll discuss the advantages and disadvantages of both fixed and variable rate mortages so you can choose the option that's best for you!

Understanding Fixed Rate Mortgages

A fixed-rate mortgage provides a consistent interest rate that remains the same for the entire term, the term ranges from 1 to 10 years, with the most common term being 5 years. This type of mortgage offers stability since your monthly payments won’t change, regardless of what happens in the economy or real estate markets.

Advantages of Fixed Rate Mortgages

1. Predictability: Fixed-rate mortgages allow you to budget with confidence. Since your monthly payment will not change, you can effectively plan for expenses without surprises.

   
   

2. Protection Against Rising Rates: If interest rates increase, you will be unaffected as your rate is locked in. This can provide peace of mind during uncertain times.

   
   

3. Easier Financial Planning: Knowing exactly what your monthly commitment is simplifies the allocation of your finances both now and in the future. Homeowners can confidently move funds knowing exactly what future expenses will be.

   
   

Disadvantages of Fixed Rate Mortgages

1. Higher Initial Rates: Fixed-rate mortgages typically start with higher interest rates compared to variable-rate options.

   
   

2. Potential for Overpayment: If the interest rates decrease, individuals with fixed-rate mortgages could end up paying more than those with variable rates, since they are locked in and unable to take advantage.

   
   

3. Less Flexibility: Fixed-rate mortgages often come with higher penalties. If you want to pay off your mortgage early or break the mortgage, you could incur significant penalties that may not be worth it.

   
   

Understanding Variable Rate Mortgages

Variable-rate mortgages are linked to the Bank of Canada interest rates, and can adjust based on market conditions. They usually offer lower initial rates, making them attractive to many first-time homebuyers.

Advantages of Variable Rate Mortgages

1. Lower Initial Rates: A variable-rate mortgage typically (but not always) starts at a lower interest rate than the fixed rate mortgage. This is very appealing to many people!

   
   

2. Potential Cost Savings: If interest rates remain stable or decrease, borrowers with variable rates can take advantage of the lower rates and less interest paid.

   
   

3. Flexibility Options: Variable-rate loans come with options to lock into a fixed rate at any time and have a smaller penalty for breaking the mortgage at just 3 months interest. This flexibility can make it easier for borrowers to adjust to changing financial circumstances.

   
   

Disadvantages of Variable Rate Mortgages

1. Interest Rate Risk: The unpredictability of interest rates poses a significant risk. If rates increase significantly, your monthly payments could rise, leading to financial strain.

   
   

2. Financial Uncertainty: Borrowers on tight budgets may find fluctuating payments stressful. This uncertainty can complicate long-term financial planning and cause unnecessary stress.

   
   

3. Possibility of Rate Shock: If rates rise rapidly, borrowers may experience “rate shock.” An unexpected increase could lead to monthly payments much higher than anticipated, catching many off guard.

   
   

Choosing What’s Right for You

Choosing between a fixed-rate and a variable-rate mortgage in Canada depends on various personal factors, including your financial health, risk tolerance, and future goals.

Assess Your Financial Situation

Consider the following aspects:

• Income Stability: Do you have a secure and reliable income? If your earnings fluctuate, the predictability of a fixed-rate mortgage may provide greater peace of mind whereas if you have a monthly financial cushion a variable rate could work.

  
  

• Future Financial Goals: Are you planning to invest in other ventures (business, real estatestock market, etc) or aiming to pay off your mortgage quickly? This could influence whether a fixed or variable rate best meets your needs.

  
  

• Risk Tolerance: Evaluate your comfort with financial uncertainties. A fixed-rate mortgage can offer more security, while a variable-rate option may present opportunities for potential savings but at a risk.

  
  

Consulting with a Professional

We recommend you contact your favourite Alberta Mortgage Broker team, Gert Martens Mortgage Team! We can offer personalized advice tailored to your financial situation and provide insights into market conditions, helping you make an informed decision.

Making an Informed Decision

Choosing between a fixed-rate and a variable-rate mortgage is a personal choice that should align with your financial goals and risk tolerance. By understanding the implications of both options and choosing an option that aligns with your goals while providing peace of mind you can make a good decision for you! If you still don't know which option is right for you, reach out to our team today!