Whether you are obtaining, renewing, or refinancing a mortgage, the biggest decision you face is choosing between a fixed and a variable rate. Making this decision is not a simple task; thus the reason to why so many people are seeking for advice to assist them in selecting the best mortgage interest type for them basing on their individual circumstances. One may either choose to go with an entire fixed 5 year term or a variable term of 3 or 5 years. To be able to benefit from both worlds, you may choose to go with a mortgage which combines both types of interest. What matters is how you tolerate this risk, your current goals, and the stage of life you are in. Below is some information about each of the options to aid you in making the right decision.
The Fixed Rate
Mortgages that have a fixed rate of interest are chosen due to the high level of stability they offer. A mortgage with a fixed rate of interest provides the security of locking in your rate of interest for your mortgage’s term. This implies that you will be able to know the exact amount of interest and principal that you’ll be paying on every regular payment throughout the selected term. The major advantage of opting for a mortgage with a fixed rate of interest is that you can depend on a rate of interest which stays the same during the mortgage’s term. The negative aspect is that you cannot take advantage of a lower rate of interest; that is, the ability to make more of the payments going towards the principle and less to the interest, that is in case interest rates fall during the mortgage’s term.
The Variable Rate
Many people in Canada avoid this option of variable rate mortgage due to the potential risk of increases in the interest rate. However, even though there’s always a risk of fluctuations in the Bank of Canada’s prime rate, this anxiety may not be as serious of a factor as you would assume. There are numerous reasons for considering a mortgage with a variable rate.
Many economic experts in Canada believe that a mortgage rate, which varies with fluctuations in the prime rate of the bank will present the biggest advantage when it gets to long term savings in interest-costs. When Dr. Moshe Milevsky, an Associate professor of finance at York University examined the mortgage rate data for Canada, he discovered the following:
- Many Canadians would have saved $20,000 on interest payments over a period of 15 years (on a mortgage of $100,000).
- Several people in Canada would have benefited more from a variable rate mortgage then they would from a 5-year fixed 89 percent of the time.
What is involved in a mortgage with a variable rate
- Regular payments for the mortgage are set for the term, even though the rates of interest may alter during the time.
- When the rates drop, a higher amount of the payment goes to the principal. When more goes into your principle, you pay less interest and the mortgage is also paid off fast.
- When the rates rise, there will be an increase in the payment portion that goes to the interest. When less is paid on the principal, the amortization period is also lengthened.
- The variable rates consist of the lowest rates more often than not.
- You are offered freedom by the variable rates to convert any particular time to a mortgage with a fixed rate with a term which is at least as long as that which is remaining on the mortgage.
Choosing to put both variable and fixed rates in one mortgage term
If you are not sure whether you should place all your eggs in one basket, you don’t have to worry about that. In case you have got enough equity in your home, there is a plan offered by some banks which might suit you best. It provides you with the flexibility to select both the variable and fixed rate mortgage in a single plan. Your mortgage can be split between variable and fixed rates with different maturities and terms so as to benefit from the potential interest savings and the predictable rate’s security.
Whether the rates fluctuate or remain stable, this strategy lessens the risk of making a decision which is bad and might help you save thousands of dollars in interest-costs over your mortgage’s life.
Fixed rate versus variable rate versus both: What should be taken?
Mobile mortgage specialists can offer you advice on the current rates that are offered by the different Canadian banks and assist you in choosing the best option for your situation and risk-tolerance. Below are some guidelines to help you get started on thinking about which is the best and right option for you.
The fixed rate mortgage is your best option if:
- You take pleasure in the rate’s security which is guaranteed to remain constant for the mortgage’s term and are prepared to pay a little higher rate of interest for the security.
- You like better the composure of predictable mortgage payments as well as amortization which are guaranteed to not change during your mortgage’s term.
The variable rate mortgage is your best option if:
- You’re contented with the fluctuations in the rate to achieve probable long tern savings in interest.
- You’ve got the flexibility to agree to the possible increases in the amortization in case the interest rate increases.
- Regular payments on the mortgage are laid down for the term, even if the interest rates have chances of fluctuating during that period.
A combination of both of the rates is your best option if:
- You have concerns about the future rates of interest and want to benefit from the fixed rate’s security, whilst wanting the probable long-term savings for a mortgage with a variable rate.
- You have got adequate equity in your house that the default insurance isn’t needed.
- You need to enjoy the best of both of the worlds.
Choosing the mortgage with a rate which works best for you
The truth of the matter is that there isn’t anyone that can be sure about what is held by the future. Instead of trying to guess where the rates are headed, it is best to consider your personal situation. You should consider your present goals, the life-stage you’re in, your objectives and the risk of tolerance.