variable mortgage

rates: which one should you choose?

Common Cents with Jacob Gaudet

Exploring the myth that it’s always better to take a fixed over a variable mortgage, and how you can choose the best option for your circumstances. When you’re looking to buy a home or renew your mortgage, one of the most import decisions you’ll have to make is whether to sign up for a fixed vs. variable mortgage. A common myth is that it’s always best to go with a fixed-rate mortgage

Up until fairly recently, many Canadians seemed to follow this advice, with around threequarters of mortgages being fixed rate (with the remainder being variable or fixed/variablerate hybrids).

During the pandemic, however, variable mortgage rates were so appealing that over half of new mortgages were variable (for renewals and home purchases)

Let’s take a look at the difference between fixed and variable mortgages and how they work What are the pros and cons of both of them? And most importantly is a fixed or variable-rate mortgage best for you?

What is a fixed mortgage and how does it work?

Regardless of whether you take out a variable or fixed mortgage, you’ll have to pay interest on the money you borrow. With a fixed-rate mortgage, you’ll sign up for a specific interest rate and will pay that rate for the entire length of your contract term (which is typically between one and five years, with five-year terms being the most popular).

Therefore, the key difference between a fixed vs. variable mortgage is that you will always know what your interest rate will be, your mortgage payments will not change, and you’ll pay consistent amounts off your mortgage principal for the duration of your mortgage term. Once you’ve chosen a fixed rate mortgage, you’re stuck with it until you renew your mortgage or decide to break your mortgage (which would normally result in a large penalty).

What is a variable mortgage and how does it work?

If you sign up for a variable mortgage, the interest rate will be based on your lender’s prime lending rate This rate is in turn based on the Bank of Canada’s key interest rate. Typically, a variable mortgage interest rate is the lender’s prime lending rate minus a certain amount For example, if your mortgage was prime minus 50 basis points and the prime rate was 5%, you would pay 4.5% interest.

The Bank of Canada uses its key interest rate to try and manage inflation and the economy If, for example, inflation is too high, the bank might raise interest rates to help lower inflation to its target rate (which is around 2%). If the economy is struggling, the bank might lower rates to boost spending and help grow the economy.

Unlike with a fixed mortgage, you’re not stuck with a variable rate. You can switch your variable rate over to a fixed rate at any time during your term, without paying a penalty

Pros and cons of a fixed-rate mortgage

A key advantage of a fixed vs. variable mortgage is that you know exactly what rate you’ll be paying over the entire course of your mortgage term and by how many years you’ll be reducing your amortization period This is helpful for people who want more control over their budgeting or who are risk averse. During periods of high inflation and severe interest-rate hikes, it can be both comforting and financially beneficial to have a mortgage rate that stays the same, regardless of what the Bank of Canada decides to do. There are also several disadvantages of a fixed vs variable mortgage Typically, fixed rates are higher than variable mortgages, at the time you sign up for it While this has not been the case so far in 2023, as variable rates are higher than fixed rates, this is more the exception then the rule

Fixed mortgages are less flexible than variable; you can’t switch to a variable mortgage without breaking your contract

If you need to break your mortgage for any reason, the penalty you will pay is based on a calculation called the interest rate differential, which is typically thousands of dollars more than the penalty for breaking a variable rate mortgage

Pros and cons of a variable-rate mortgage

In the past, variable mortgages have saved homeowners money over the term of the mortgage. Typically, the variable mortgage rate available at any one time is significantly lower than the best comparable fixed mortgage rate This difference is often as much as 100 basis points (one percentage point) or more Taking on a variable mortgage is riskier and so the rate is usually discounted to reflect that risk

A key advantage of a variable mortgage is that, if you need to break your mortgage for any reason, the penalty is typically three months of interest, which is usually considerably less than the penalty you’d pay with a fixed mortgage You can also convert your variable mortgage to a fixed mortgage at any time, with no penalty. The main disadvantage of a variable-rate mortgage is that if interest rates rise, so does your mortgage interest. As we mentioned, this can lead to either higher mortgage payments (which can derail your budget) or lower principal payments (which can extend the amortization period of your mortgage)

Fixed vs. variable mortgage: which is better for you?

This is very much a loaded question; in that it suggests that one or the other might be better for everyone The best option will depend on your own unique situation, your risk tolerance level and the type of mortgage that fits best into your financial plan.

The answer will also depend on where rates stand at the time, you’re making your decision. For example, if variable rates are on the higher end (around 5%), fixed rates are a whole percentage point higher, and the Bank of Canada is signaling that rates might soon be on a downward trend, then a variable mortgage could be a wise option. Alternatively, if variable rates are considerably higher than fixed rates and the Bank of Canada’s rate is unlikely to fall any time soon, then a variable mortgage may not be the best choice

Any mortgage should be considered within the context of your financial plan and far beyond simply fixed vs variable This includes the size of the mortgage, the rate, the term, the amortization period, monthly payments, prepayment privileges (how much of your principal you can pay off early), prepayment penalties and portability (the ability to take it with you if you buy a new home).

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Aries: March 21 - April 19 (Fire) –Let's find a way to bring abundance in your life this week There are opportunities to increase your income at work, you just must ask the right people You have a lot of bumps in the road lately in your relationship and need all your love and attention.

Taurus: April 20 - May 20 (Earth) –Fresh new start is coming for you. This may be at work, but most likely is about your love life You may decide to take the next step or start a new relationship, either way this is the change you have been asking for, so ride it out

Gemini: May 21 - June 20 (Air) –

You have a great failure you now have to deal with This could make you start to question all that's in your life Stay away from making bigging choices while you feel this way. This passes by the weekend and you will have to go out and have some stress-free fun.

Cancer: June 21 – July 22 22 (Water) – You are ready for social events and to make your big debut What are you really interested in doing this summer? You must make this choice without worrying about financial gain or what your loved ones think. This is your only choice

Leo: July 23 - August 22 (Fire)

– You deserve a promotion, but you will not get it if you do not ask for it. Your soul is tired and wants recognition in every area of your life Start with your love life, let them know your struggles and get the support you need to then take on your boss next Get all you deserve

Virgo: August 23 - September 22 (Earth) – You will encounter stress in your relationship this week This will hit a boiling point and you will question if the work is worth it Say what you truly feel, you need to know where you truly stand. Then book a doctor appointment and do a check-up.

Libra: September 23 - October 22 (Air) - Work is going to overwhelm you this week to the point where you will have to ask for some help The health issues you have been ignoring are now going to have to be dealt with, so just make the appointment and show up to them Unexpected costs will arise, save some of your money

Scorpio: October 23 - November 21 (Water) – You will have personal problems come up and you will need to take time for yourself to deal with them. Let your loved ones know and be prepared to be a bit stressed out. It is important you keep communication open with all around you till you get through it

Sagittarius: November 22December 21 (Fire) – Frustrations at work will have you looking around to see what other options are out there You are ready for change, if not in your career, then you will go to your love life, then to your health I would try and change a little of all 3 areas so you can finally feel balanced.

Capricorn: December 22 - January 19 (Earth) – You are stressed to the max Stop for a moment and smell the flowers. You need to get out and have some fun this week. Go and talk to your favourite person and make some plans to go out and relax

Aquarius: January 20 – February 18 (Air) – You may feel like you are stuck in the middle of a lot of unwanted drama You will have to do some problem solving and back and forth to smooth things over. You hate doing it, but you are about to see how good at it you are.

Pisces: February 19 - March 20 (Water) – You will be feeling very drained this week. You will have to tread lightly this week, lay low and do some at home projects By Friday you will have a bit more energy, now you can go out in public and be your fun-loving self

with Tina Graziano Energy Reader

Tina Graziano was born an energy reader. She uses her gifts to heal and guide others as a life coach. If you need support and insight in life, contact Tina for an energy reading directly online at https://www.facebook.com/ Tina.Graziano.Energy.Reader