When it comes to choosing a mortgage, one of the most important decisions you’ll make is whether to go with a fixed-rate or variable-rate mortgage. Each type has its own advantages and considerations, and understanding the differences can help you make the best decision for your financial situation.
Fixed-Rate Mortgages
A fixed-rate mortgage is one where the interest rate remains constant throughout the term of the loan. Here are some key features:
- Stability and Predictability: Your mortgage payments will remain the same for the entire term, making budgeting easier.
- Protection from Interest Rate Increases: If market interest rates rise, your rate stays the same, potentially saving you money.
- Higher Initial Rates: Fixed-rate mortgages generally have higher interest rates compared to variable-rate mortgages at the outset. FYI at the time of writing this in summer of 2024 that is not the case.
- Cancellation: In order to cancel a fixed rate mortgage, you pay the greater of three
months interest or an interest rate differential calculation, whichever is larger. The interest rate differential calculation is made by taking the difference between your new interest rate and your current one then multiplying that by the time remaining on your contract and your outstanding balance.
Variable-Rate Mortgages
A variable-rate mortgage, on the other hand, has an interest rate that can fluctuate based on changes in the prime lending rate. Key features include:
- Potential for Lower Rates: Variable-rate mortgages often start with lower rates than fixed-rate mortgages, which can lead to lower initial payments. Again, at the time of writing this in summer 2024 that’s not the case.
- Interest Rate Risk: If the prime rate increases, your mortgage rate and payments can also increase. About 75% of variable rate mortgages in Canada have fixed payments.
- Possible Savings: If interest rates remain stable or decrease, you could pay less over the term compared to a fixed-rate mortgage.
- Cancellation: In order to cancel a variable rate mortgage you simply pay three months interest.
Conclusion
Both fixed and variable-rate mortgages have their pros and cons. Understanding these
differences, along with the potential impact of the IRD penalty, can help you make an informed decision that aligns with your financial goals and circumstances.