When it comes to mortgages, most borrowers will ask at some point in time: “Should I go with a variable or fixed rate?”. To make an informed decision, it is important to have in mind what your short- and long-term goals are additionally to the historical trends.
When it comes to variable versus fixed rate, it is important to understand what that means. Fixed mortgages are based on a fixed interest rate that is set for the duration of the term; the result is a fixed payment until the end of the term. On the other hand, variable-rate mortgages fluctuate with the Prime Rate resulting in either a change in payment amount or in amortization- that is lender-based.
In the last 10 years, the prime lending rate has fluctuated by a few percents upward and downward. It now sits at 2.45% as of January 2022. Due to recent events, these rates have seen even more of a downturn providing huge benefits to new borrowers looking to pay as little as possible in interest costs.
One of the most important aspects of variable rate is that, historically the choice of a variable rate mortgage over a fixed rate mortgage has allowed borrowers to save in interest costs.
However, due to the uncertainty and potential fluctuations that can occur with a variable rate mortgage, it comes down to the borrowers’ comfort level. Some borrowers have no room in their budget for potential changes in mortgage payments, or they do not like the uncertainty. For these clients, a fixed rate would be the best choice.
On the other hand, clients who are comfortable with a variable rate mortgage have a unique opportunity to take advantage of lower interest rates.
If you have a variable rate mortgage, increase your monthly payment amount to what it would have been if fixed rate was chosen. If prime rate increases, you will have already been budgeting for the higher payment. In the meantime, until the Prime Rate increases (if it increases), each payment made is paying down your principal loan even faster.
For borrowers that start out in a variable rate mortgage, but begin to feel uneasy about it, there is also the option to have the lender change it to a fixed rate. Doing that usually means your rate will be higher, but for some, the peace of mind that the payment is locked, is worth the increase in rate.
Another benefit to variable rate mortgages is that, if you choose to sell your house before the mortgage term is up, the penalty is three months of interest as opposed to much heavier interest rate differential (IRD) calculations used to determine fixed rate mortgage penalties. IRD is lender specific.
If your mortgage is maturing in the next 90-180 days and you are not quite sure what to do, it is a good idea to contact a Mortgage Broker. I would be happy to assess your situation and go through the various options with you.