Fixed or Variable-Rate Mortgage?

“Wow, look at the mortgage rate those guys are advertising,” you might be thinking. It seems like your worries are over – just lock in a rate like that for the next five years, and you’ve got it made.

Not so fast. Right now, the lowest available rate – and the one that makes the rate sign look great from the street – will be for a variable mortgage. With a variable-rate mortgage, your mortgage rate will move in conjunction with your lender’s Prime lending rate, which in turn tracks the Bank of Canada’s benchmark rate, and will typically be quoted as Prime minus a specified percentage. Unless you have an economic crystal ball, you won’t be able to predict what kind of rate ups and downs might be ahead of you.

With a fixed-rate mortgage, your payments are fixed for the term of the mortgage, which offers stability. Because of changes to mortgage rules, locking in for five years or longer allows you to borrow more. Fixed-rates are usually better suited to first-time buyers or those who haven’t owned a home for a very long period. Ask yourself these questions:

• Do you like or need to know exactly what your payment is going to be over a longer period of time?
• Do you want to avoid the need to consistently watch rates?
• Do you have less than 20 per cent down?

If you answered “yes” to all or most of these questions, a fixed-rate mortgage could be the better choice for you.

A variable-rate mortgage is better-suited to people who have a flexible budget and can tolerate higher risk. Consider these questions:

• Do you watch market conditions?
• Can you handle any sudden rate increases that could increase your payment?
• Do you have more than 20 per cent equity in your home?

If you answered “yes” to all or most of this list of questions, a variable-rate mortgage might best suit your needs. Most variables allow you to exercise an option to “lock in” a fixed rate at any time for the remaining portion of your mortgage term or longer.

If the uncertainty of a variable rate is going to give you sleepless nights, you’re in good company. Many Canadians prefer the certainty of a fixed-rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plan accordingly…with no financial surprises! However, lower-rate variable mortgages with a strong Prime minus offer give you the potential to save on interest. Your best option is to have a mortgage professional help you decide which financing best meets your needs.

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Rasha Ingratta & Mortgage Associates

By Mortgage Intelligence

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