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24 Jun

Fixed vs Variable Mortgages | What’s The Difference?

Mortgage Tips

Posted by: Chanele Langevin

What is a Fixed Interest Rate Mortgage? 

A fixed interest rate mortgage means that the interest rate will remain the same throughout the term of your mortgage.  This means you will know exactly what your payments will be, what amount of that payment goes toward your principal, and what amount goes toward the interest portion.

If you are someone that does not like to take any risk or is particular about payments being consistent, the fixed mortgage is a more comfortable option.  You will always know what your payment will be and there are no surprises for the length of your term.

Now more than ever, consumers are faced with a lot of changes in their lives.  If you have a situation that requires you to “break your term” such as moving to a different location, or if you take advantage of a lower interest rate by refinancing, your current lender will charge you a “payout penalty”.  That penalty calculation is another important factor when choosing a fixed vs variable mortgage. A fixed rate may imply a penalty of 3 months interest or an “Interest Differential Penalty”, depending on which is the greater of the two.

What is a Variable Interest Rate Mortgage?

A variable interest rate mortgage may also be referred to as an Adjustable interest rate mortgage. 

With a variable interest rate, the rate will fluctuate according to the current Prime interest rate.  It can go higher, and it can go lower than the initial interest rate you signed off on with your mortgage contract.  The discount on Prime is what will remain consistent.

Historically, variable rates are the most cost-effective for the consumers. However, with higher rewards come higher uncertainty. Another aspect of variable rate is that you can “lock-in” your rate if the prime rate does begin to increase. The lender would then lock your rate to a fixed rate structure for the remaining months of your original term.

A variable rate will always accrue a 3 month interest penalty which is usually the most favourable penalty calculation if the mortgage term had to be broken due to the sale of home or refinance.   

As an experienced Mortgage Broker with Dominion Lending Centres, I am equipped with the knowledge and expertise to assess each clients’ situation and advise as to which option would be the best fit for your needs. Contact me with any questions or concerns, regarding all your mortgage lending needs.