The decision to choose a fixed or variable rate is not an easy one. It depends on your tolerance for risk as well as your ability to withstand increases in mortgage payments. You can sometimes expect a financial reward for going with the variable rate, although the precise amount is dependent on the rise and fall of the Bank of Canada prime rate. .
Fixed Rate Mortgages
Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples purchasing their first home might be better off opting for the peace of mind that a fixed-rate brings. The interest rate on a fixed-rate mortgage is set for a predetermined period of time, 1 to 5 years, 7 and 10 year terms
Variable Rate Mortgages
A variable rate mortgage often allows the borrower to take advantage of lower rates – the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus or plus a set percentage. For example, the current prime mortgage rate is 3.0 percent, the holder of a prime minus 0.5 percent mortgage would pay a 2.50 percent variable interest rate.
As a consumer, the best option is to have a candid discussion with your Mortgage Associate to ensure you have a full understanding of the risks and rewards of each type of mortgage.