There are a wide variety of mortgage products available to Canadian home buyers. Each product offers its own benefits and disadvantages, so it's important to review all of the different types prior to making a final decision. Let's take a look at the two most popular mortgage plans available to Canadians and how they function.
Fixed rate mortgage
A fixed mortgage rate is a mortgage where the rate of interest is fixed for a specific period of time. Generally referred to as the mortgage term, this span of time can range from 6 months to 25 years. As time goes on, more of the mortgage payment goes directly towards the mortgage principal and less of the payment goes towards interest. Start crunching the numbers of a fixed rate mortgage using the Family Lending online mortgage calculator.
Variable rate mortgage
A variable rate mortgage (also known as a floating rate mortgage) has fixed payments, like a fixed mortgage, however the interest rate fluctuates with any changes in interest rates. If interest rates go down, more of your regular payment will go towards the mortgage principal. If the rate goes up, more of the payment will be spent on interest. Variable rate is determined against the Bank of Canada’s See a variable rate in action using our free online variable rate mortgage calculator.
Fixed rate versus variable rate mortgage
When it comes to deciding between these two mortgage types, it's important to remember that:
- Variable mortgage rates usually have a lower interest rate than fixed mortgages, but this rate may go up at any time.
- A fixed rate mortgage gives you 100% certainty that your payments will not change for the entire length of your mortgage term.
Fixed rate versus variable rate – which is better?
Determining which mortgage rate is better really depends on your personality and financial stability. If you loose sleep at night worrying about changing interest rates or reviewing variable rate mortgage history, then a fixed rate mortgage is likely a better fit for you. Variable rate mortgages can have a big impact on your monthly budget as they're constantly changing. If your comfortable with taking a little bit of risk, a variable rate mortgage could be the better financial fit for your situation. If you'd like to run the numbers on a floating mortgage, check out the Family Lending variable rate mortgage calculator.
Food for thought
When it comes to understanding the risk involved with a floating rate mortgage it's always best to review variable rate mortgage history. Back in 2000, a detailed study of variable rate mortgages completed by Moshe Arye Milllevsky of York University showed that consumers were better off, on average, financing a mortgage with a short term floating interest rate, compared to locking in a long term fixed mortgage rate. The average consumer paid $22,000 less on a $100,000 mortgage over an amortization period of 15 years when they borrowed at prime and renewed annually.
Still need help answering the fixed rate versus variable rate mortgage conundrum, even after reviewing figures on the Family Lending online mortgage calculator? Then give us a call, toll-free at 1-866-941-6678 and one of our professional mortgage brokers will help you make an educated decision.