Variable vs Fixed rate mortgage
When trying to decide which mortgage type to go with, a variable vs fixed rate mortgage, you have to ask yourself how tolerant you are with risk. A variable rate mortgage traditionally has a better discounted rate than the fixed rate mortgage, but it can change at any time depending on what decision the Bank of Canada makes on its overnight rate. As the Bank of Canada increases or decreases its overnight rate, so too will the chartered banks and other lenders that borrow money from the Bank of Canada increase or decrease their prime lending rates, which in turn affects the variable rate.
If you don’t want to worry about interest rates going up or down during the contractual term that you have agreed upon with your mortgage, then the best bet would be to go with a fixed rate term. This way you know for sure that your mortgage interest rate is locked in and guaranteed not to change within the term. For example, if you go with a 5 year closed fixed term; your mortgage interest rate will not change until the end of the fifth year. For some, the disadvantage to this mortgage product is the fact that your rate will not go down should the Bank of Canada lower its overnight lending rate as would be the case with the variable rate mortgage product.
When contemplating whether to go with variable vs fixed rate mortgage, know that it is ultimately up to the lender to decide if they are going to change their prime rate or not every time the Bank of Canada changes their rate. Sometimes Banks and other lenders of mortgage products will choose not to change their prime rate although the Bank of Canada changes theirs. Historically though, whenever the Bank of Canada changes their overnight rate, shortly after the banks adjust their rates accordingly.
Others might be thinking to break their mortgage in the middle of the term; whether it be for the reason of selling their home to take advantage of increased equity and home value due to favorable market conditions, or because they may not be happy with the current lender or interest rate, and for any other reason. To break a fixed term mortgage is more expensive than to break a variable rate mortgage. The lenders use different formulas to calculate the mortgage penalty to break the mortgage. With the fixed term, the lenders use a formula called Interest Rate Differential, and with the variable rate they only charge the client three months of interest payments. Therefore it can be much cheaper to break a variable vs fixed rate mortgage.
When considering these matters it is always best to consult with a mortgage broker or mortgage agent. These professionals are trained, and licensed to work on your behalf and to give you unbiased and sound advice regarding your mortgage options.