With recent changes to the Bank of Canada's Prime Rate in 2017 (after 7 years with no changes!) many clients are asking if they should lock in their current variable rate to a fixed rate, and new home buyers are wondering if they should select a fixed rate from the start. With these recent changes, I always go back to my original thought process on the variable vs. fixed debate. You have to decide what's best for your current financial picture, long-term financial goals, future plans with the house, budget, risk tolerance and overall comfort for your family. And I'm here to support you.
Let's look at the difference between the two...
Fixed Interest Rate Mortgage:
A fixed interest rate stays the same during the term of your mortgage. The rate does not change and neither does your payment. However, fixed interest rates are higher than variable rates, but eventually the variable rate may increase higher than the fixed rate that you locked in at. The potential downside to a fixed interest rate mortgage is the potentially large penalty of Interest Rate Differential if you were to prepay (break) your mortgage before maturity.
Fixed rate option is excellent for homebuyers who:
A) Have a lower risk tolerance
B) Operate on a budget with little to no wiggle room
C) Need to know the exact amount of their mortgage payment
D) Little risk of life events requiring them to prepay their mortgage before maturity
Variable Interest Rate Mortgage:
A variable interest rate fluctuates with the Bank of Canada's Prime Rate, therefore your mortgage payments may change during the term of your mortgage. However, if you want your payment to stay the same it may be possible to set your payment at a higher rate and therefore not notice increases or decreases in the rate affecting your payment (bonus - extra payment amount goes directly to your principal!) Plus, you can lock into a fixed rate during the term of your mortgage if you choose. Some studies have shown even with fluctuations, the majority of borrowers save with a variable interest rate (Source: Government of Canada). Another benefit is the substantially lower penalty if you were to prepay (break) your mortgage before maturity.
Variable rate option is excellent for homebuyers who:
A) Have a tolerance for risk (Think investments! What's your risk tolerance?)
B) Is somewhat flexible in their monthly budget
C) Are comfortable with their mortgage payment possibly changing
D) Want the freedom of prepaying their mortgage before maturity because of the reduced prepayment penalty over Interest Rate Differential with fixed interest rate mortgages
Payment Examples with Prime Rate Changes with a $250,000 Mortgage (5 year term, 25 year amortization)
Prime Rate Interest Rate Principal & Interest Monthly Payment
2.70% (2010-2017) Prime less 0.35 $1101.33
2.95% (July 2017) Prime less 0.35 $1132.41
3.20% (September 2017) Prime less 0.35 $1163.96
Final Thoughts:
It's very important to discuss your risk tolerance, budget, current and future financial picture and potential life events with your mortgage professional when buying a home. Be sure to do business with someone you can freely talk to about your preferences and who can provide you with unbiased advice.
*Note: Some lenders may set their own Prime Rate different than the Bank of Canada's Prime Rate.
As always, looking forward to your questions!
-Sarah
(844) 315-6609
sarahnm@mortgagegroup.com