The fixed rate mortgage versus variable rate mortgage debate is always ongoing. As fixed rates are at an all time low of 2.25 per cent, most people are naturally inclined towards going in for a fixed rate mortgage. On the face of it, it looks like a win-win situation - opting for a fixed rate mortgage ensures a locked-in low mortgage rate which lasts throughout the mortgage term, without having to worry about a sudden increase in the rates. People fall for the fixed mortgage trap as banks tend to ride on the fear in people's minds that variable rates may increase, portraying it as a 'certain' risk. Truth be told, banks favour 5-year fixed rate mortgages as these work in their favour. In reality, variable rate mortgages aren't half as bad as they are portrayed to be. We shall explain why!
A Reality Check
While most people believe and are led to believe that the variable rate may shoot up, in reality, to set the prime rate, Bank of Canada holds meetings eight times in a year. Variable rates are directly affected by the prime rate which doesn't change so often. Whenever there is a change in the prime rate it is about 0.25 per cent. So, the variable rate would be more than the fixed rate only if the Bank of Canada increases its rates in successive meetings, many times, which has never happened. Hence, variable rate mortgages will be favourable for those who opt for them.
Fixed rates are low indeed, but so is the case with variable rates. If you have doubts about which mortgage to choose, the time is favourable for variable rate mortgages, as you may save a lot with this option. Your variable rate may change and be higher than the prevalent fixed rate in the coming years. But what you save in return will be of immense value. But you must also be prepared for the worst case events. This would be if your rate doubles. You must, however, know what this means as most think that if the rate doubles so do your payments. This is never the case as the payments would increase only by 32 per cent. But if you opt for variable rate mortgages you can sit back and enjoy at least one to three years of low rates. So while variable rates are near zero you save much more than what you will spend if the rates go up, and when they go up. Give it a thought!
Another downside of fixed rate mortgages is the penalties you may have to pay for walking out one. Did you know that the penalty for exiting a variable rate mortgage is capped at an interest rate of three months?
Meanwhile, if you want to take up a mortgage and need help with the paperwork, are stuck with which mortgage would suit you and your finances the best, do write to us at LendX.