Variable vs Fixed Rate Mortgages
Is there a potential to save?
Variable vs Fixed Mortgage Rates: Making the Right Choice
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When it comes to mortgages, one of the biggest decisions you'll face is choosing between a variable rate mortgage and a fixed rate mortgage. Your choice can have a significant impact on your monthly payments, financial flexibility, and overall savings. Let's explore the pros and cons of each option to help you make an informed decision.
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Variable Rate Mortgage: Save More, Risk More
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A variable rate mortgage is tied to changes in the prime rate, causing your interest rate and mortgage payments to fluctuate. While variable rates are typically lower than fixed rates, they come with a degree of risk due to potential rate increases.
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Pros:
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Potential to save more on interest over your mortgage term.
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If rates decrease, you pay less interest.
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Historically, variable rates tend to outperform fixed rates for savings.
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Lower penalties for breaking or switching the mortgage.
Cons:
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If rates rise, your monthly payment increases, impacting your budget.
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Higher payments if rates increase.
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Some variable rate mortgages aren't transferable if you sell your home during the term.
Concerns about rate fluctuations during your term.
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Fixed Rate Mortgage: Stress Less, Budget More
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With a fixed rate mortgage, your interest rate remains constant throughout the term, providing payment and interest rate stability. While fixed rates are often higher, they offer peace of mind and predictability.
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Pros:
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Rate remains fixed for the entire mortgage term.
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Payments and interest won't change, making budgeting easier.
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Protection against rate increases during your term.
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Fixed-rate terms are usually transferable if you move to a new property.
Cons:
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Higher penalties for breaking or switching the mortgage.
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Historically, fixed rates can be higher than variable rates, potentially costing more.
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If rates decrease during your term, you'll need to refinance or wait for renewal to benefit.
Which Mortgage Rate is Popular?
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Around 60% of clients opt for a 5-year fixed rate mortgage, while approximately 30% choose a 5-year variable rate mortgage. The 5-year term is favored because it often offers the best value.
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However, market conditions and individual preferences can influence this choice. During periods of low interest rates, more clients may opt for variable rates, while those seeking stability and predictability may lean towards fixed rates.
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Who Chooses Variable Rates?
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Variable rate mortgages appeal to clients who can tolerate some risk and want to maximize savings. They are often chosen by financially established individuals who are comfortable with rate fluctuations and can manage higher payments if rates rise.
Variable rates are also suitable for those who may need to break their mortgage before the term ends, as they typically have lower penalties for changes or lender switches.
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Who Chooses Fixed Rates?
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First-time homebuyers, risk-averse individuals, and those who prefer consistent monthly budgets often opt for fixed rate mortgages. They provide peace of mind and are well-suited for homeowners with limited budget flexibility.
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Additionally, individuals planning to stay in their homes for the entire mortgage term may choose fixed rates, especially if variable and fixed rates have a minimal spread.
How Much Lower are Variable Rates?
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The typical difference between a 5-year variable and fixed rate ranges from 0.25% to 1%. During exceptional periods, this spread may widen further. Some clients find any rate difference sufficient to offset potential risks.
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A study by CIBC revealed that 88% of the time, choosing a variable rate mortgage over a fixed rate mortgage proved financially beneficial.
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Which Mortgage Rate is Best for You?
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Ultimately, your decision boils down to three key questions:
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Can you comfortably handle the risks associated with a variable rate?
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Is your budget resilient enough to accommodate a significant rate increase?
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Do you plan to sell your property within three years or aim for faster mortgage repayment?
Choosing the right mortgage rate is crucial, and we're here to help. At MortgagePal, we bring extensive industry experience to the table. We'll analyze your unique situation, provide tailored advice, and help you secure the best rate possible, whether you opt for a variable or fixed rate.
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Rest assured, your mortgage journey is in capable hands with us.
Contact us today to make an informed decision on the right lending solution for your mortgage.