Understanding Fixed vs. Variable Rate Mortgages

Deciding between a fixed or variable rate doesn’t just impact the interest in a loan but could also prove to be one of the most vital financial decisions. Selecting a suitable mortgage option can often appear to be a daunting task however it is a key step to owning a home. Both Fixed and variable rate options have their advantages, drawbacks as well as differ as per market conditions, and the financial status of an individual. On the other hand, the perpetual decision making concern can be greatly alleviated by grasping the intricacies between the two options.

As Team Sabharwal has grown to become the epitome of guiding homebuyers, understanding their financial needs and goals, we aim to assist them in devising a comprehensive mortgage strategy. In this segment, allow us to help you understand Fixed and Variable Rate mortgages as these will allow you to decide which option is most suitable for you.

What is a Fixed Rate Mortgage?

A mortgage is characterized by a fixed rate when the interest rate for the loan is set for an extended period of anywhere between one to ten years. This implies that irrespective of the market conditions, the interest rate will remain unchanged and will ensure that the borrowers monthly payments are both stable and consistent with the amount assigned during the loaning period.

Benefits of a fixed rate mortgage

Predictability: A fixed rate enables individuals to avoid worrying about their interest rate or payments changing thus making calculations a whole lot easier and convenient.

Protection from Market Changes: If the market witnesses an increase in the interest rates, your mortgage rate will not be impacted.

Peace of Mind: An advantage along the lines of reassurance, borrowers do not need to be anxious about their monthly expenses increasing due to market changes.

Pros & Cons of Fixed Rate Mortgage

Disadvantages of a Fixed Rate Mortgage

Higher Initial Rate: It is usually noted that a Fixed rate is higher than a Variable fixed rate when opening account of investment.

Less Flexibility: Most mortgages come with penalties for breaking them a hard enough of time to redeem your main terms that you signed by breaking a fixed mortgage.

Potentially Paying More Over Time: If the interest rates drops then you maybe in a more undesirable situation not having the lower payments.

What Is a Variable Rate Mortgage?

Variable rate mortgage is associated with prime lending rates of the lender based on what the rate specified and influenced by other entities such as interest rate policies of Bank of Canada. In this case with rates being high, payments on the mortgage are also high.

Advantages of a Variable Rate Mortgage

Lower Initial Rates: Since people are now used to negative government corporate tax returns for non resident shareholders of corporations, the practice of lowering interest rates for new sameness of a fixed mortgage has increased over time.

Potential for Cost Savings: If the factors increase or level out in interest rates, you may end up spending less when multiplied over the time span of the mortgage.

More Flexibility: This breaks any other penalties of time and would also enable greater refines on mortgages after decoupling.

Disadvantages of a Variable Rate Mortgage

Uncertainty: This adversely affects your ability to budget as your payments would increase if interest rates rise.

Increased Financial Risk: A direct impact on affordability would be due to greater payments from sudden increase in rate hence increasing financial risk.

Stress of Market Monitoring: As a homeowner who pays variable mortgages, it is essential to monitor economic changes very carefully.

Which Mortgage Type Is Suitable For You?

There are a number of components that determine whether one should take a fixed mortgage or a variable one, such as, ability to take risk, the security of finances and the situation in the market.

Choose a Fixed Rate Mortgage If:

The situation or scenarios you face are too uncomfortable so you would rather their repayment to be made predictable

You see yourself living in the same house for a long duration and have no desire of refinancing.

You are worried that the rates will increase as time goes on making a fixed mortgage less favorable later on.

Choose a Variable Rate Mortgage If:

A little risk and the roulette of payment amounts every month doesn’t affect your plans in a negative way.

You see the potential of saving money and being able to invest that into things you would like to pay off soon.

You have plans of selling the house or remortgaging the house before the contract expires and having to pay excessive charges for changing your accounts.

Market Trends and Considerations

The rates attached to mortgages rely heavily on the preferences shown by the Bank of Canada. For inflationary periods, where the economy is doing well and in such times interest rates are usually high, fixed rate mortgages would be the best course of action. However, in non inflationary periods, where fixed rate mortgages are less appealing, Canadian inflationary mortgages could work well.

You must examine the interest rates and keep yourself updated so that you may alter your plans if needed. Ignoring this is bad practice, so employing a mortgage advisor is beneficial as they recommend you actions based on the situations and how the market is currently performing along with predicting it.

How Team Sabharwal Can Help

Team Sabharwal prides itself in recognizing the fact that every home buyer has his own financial challenges. Our real estate specialists will write alongside mortgage experts at Keller Who to assist you with mortgage options available to you. When it comes to selecting a fixed or a variable rate mortgage, we make certain you understand the selection process and have the tools necessary to make the correct selection.