Once you’ve settled the question of open or closed term, you will inevitably have to decide between a fixed and variable rate. Which is best for your situation?
When the time comes to choose your mortgage term, there are a number of elements to take into account, including your financial means, your risk tolerance and the economic situation. To demystify it all and equip you to make the best possible decision, here’s some information that will help you make an informed choice about your mortgage type.
Fixed- versus variable-rate: which is lower?
As a general rule, variable-rate mortgages tend to be lower than fixed-rates. To understand the difference, you need to look at how these rates are calculated. Essentially, a financial institution’s variable interest rate corresponds to its preferential rate. This is established based on the Bank of Canada’s overnight rate. Add a certain percentage to this, and you have the variable rate.
As with fixed-rate mortgages, the monthly payment amount usually stays the same, but the ratio of interest to principal is subject to market fluctuations. There are also certain types of variable-rate mortgages where the monthly payment varies based on the fluctuation of market interest rates. With a fixed-rate mortgage on the other hand, you are guaranteed to always have the same amount dedicated to repaying your principal, regardless of what the market does.[……]