Fixed-Rate vs. Variable-Rate Mortgages
When you’re looking to get a mortgage, one of the first decisions you’ll need to make is whether to go with a fixed-rate or variable-rate mortgage. Each option has its perks and potential downsides depending on what you’re after financially and how much risk you’re okay with. Let’s break it down in a simple way to help you decide which could be the best fit for you.
What’s a Fixed-Rate Mortgage?
A fixed-rate mortgage locks in your interest rate for the entire term of the loan (usually 1 to 5 years). This means your monthly payments stay the same, no matter what’s happening in the economy.
Why People Like Fixed-Rate Mortgages:
- Predictable Payments: You’ll know exactly how much you need to pay each month, which makes budgeting a breeze.
- Protection Against Rising Rates: If interest rates go up, your payments stay the same. No surprises.
- Peace of Mind: It’s a solid choice if you like the idea of steady, predictable payments over time.
The Downsides of Fixed-Rate Mortgages:
- Higher Starting Rates: Typically, you’ll pay a bit more in interest compared to a variable-rate mortgage, at least initially.
- No Benefit from Lower Rates: If interest rates drop, you won’t see any savings unless you refinance, which can be a bit of a hassle.
- Early Exit Penalties: If you need to break the mortgage before the term is up, expect some hefty penalties.
What’s a Variable-Rate Mortgage?
A variable-rate mortgage has an interest rate that can change over time, based on things like the Bank of Canada’s interest rates. Your payments can go up or down depending on the market.
Why People Like Variable-Rate Mortgages:
- Lower Starting Rates: Usually, variable-rate mortgages start with lower rates, so you’ll pay less at the beginning.
- Savings Potential: If interest rates drop, your payments could go down too, which could help you pay off your mortgage faster or just save you some money.
- Lower Penalties for Breaking the Mortgage: If you decide to leave early, you’re more likely to pay lower penalties compared to fixed-rate mortgages.
The Downsides of Variable-Rate Mortgages:
- Unpredictable Payments: Since rates can go up, your payments might increase, which could make it harder to budget.
- Risk of Higher Payments: If interest rates jump significantly, your payments might become tough to handle.
- Stress and Uncertainty: If you prefer knowing exactly what you’re paying each month, the fluctuations might cause some anxiety.
Things to Think About When Deciding:
- How Comfortable Are You with Risk?
- If you’re more of a “set it and forget it” type, a fixed-rate mortgage could feel safer.
- But if you don’t mind a bit of uncertainty and think interest rates might stay the same or go down, a variable-rate mortgage could save you some money.
- What’s the Interest Rate Climate?
- If interest rates are on the rise, locking in a fixed-rate could save you from paying more later.
- If rates are stable or dropping, a variable-rate mortgage could be a good chance to save on interest.
- What’s Your Financial Situation Like?
- If you’re on a tighter budget and need to know exactly how much you’re paying, a fixed-rate mortgage might be the way to go.
- If you’ve got some flexibility and can handle a bit of risk, a variable-rate mortgage might give you the chance to save in the long run.
- Are You Staying Put or Moving Soon?
- If you plan to sell or refinance your home in the near future, a variable-rate mortgage can be cheaper due to lower penalties for early exit.
- If you’re planning to stay in your home for years, a fixed-rate mortgage can give you peace of mind.
Final Thoughts
Choosing between a fixed-rate and a variable-rate mortgage is really about what feels right for you. Whether you want the steady comfort of fixed payments or the potential savings of variable rates, both options have their benefits. Just think about your situation, how much risk you’re okay with, and what your long-term plans are. Before jumping in, it’s always a good idea to chat with a mortgage broker or financial advisor. They can help you understand the market and pick the mortgage that works best for your unique situation.