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Fixed vs. variable-rate mortgages: Which is right for you?

Buying a home is likely the biggest purchase you’ll ever make.

But before you can pack up and move in, you’ll need to secure a mortgage. This is often a long-term commitment. The average Canadian expects to pay off their mortgage by age 59, so it’s important to do your research and choose the option that’s best suited to you.

Basically, when it comes to the mortgage interest rate you’ll pay, you have two ways to go, fixed or variable. Which is better? Well, that depends on your risk tolerance.

To help you think through your options, we’ve outlined the differences between fixed rate and variable rate mortgages:

Fixed-rate mortgages are predictable.

With a fixed-rate mortgage, the mortgage rate and payment you make each month (or whichever frequency you choose to pay) will stay constant for the term of your mortgage.

This means you’ll know exactly how much principal (the initial amount borrowed) and interest (the amount paid on the amount you borrowed) you’ll be paying on each scheduled mortgage payment throughout the term you select.

The downside? You won’t be able to tap into a lower interest rate — ensuring more of your payments go towards the principal and less to interest — if interest rates drop during the term of your mortgage.

What a fixed-rate mortgage offers:

  • Your “set it and forget it” choice
  • Doesn’t change if the bank’s prime lending rate goes up or down
  • Eases budgeting anxiety and increases predictability

The drawbacks:

  • You may pay a premium for the stability
  • You may miss out on potential interest rate drops

Tip: Interest rates vary widely depending on the term you choose. For example, the interest rate on a 10-year fixed-rate mortgage could be almost twice as much as the interest rate on a typical 3-year fixed rate mortgage.

Variable-rate mortgages will fluctuate.

With a variable-rate mortgage, the mortgage rate will change with the bank’s prime lending rate. In this case, your scheduled payments will remain the same, but the amount paid towards your principal will vary.

Cautious buyers often choose a fixed mortgage because it means they can budget for the length of their mortgage term without any surprises. Variable rates are more unpredictable, but could work to your advantage if you can handle a bit of risk and uncertainty.

What a variable-rate mortgage offers:

  • Your “let’s see what happens” choice
  • Costs will be less if interest rates drop
  • Offers the possibility to lock in a better rate down the road

The drawbacks:

  • Works against you if interest rates rise
  • May increase your financial uncertainty

Tip: If you’re the type of person that always buys the extended warranty, then a variable rate mortgage is probably not for you.

How to choose what’s right for you

How do you feel about risk? A fixed-rate mortgage means the lender takes the risk; a variable-rate mortgage means you do. While the interest rate may be higher on a fixed-rate mortgage, it will stay constant during your term so you can budget accordingly.

How do you feel about the current market? The difference between fixed and variable rates has narrowed considerably in the last few years, making fixed-rate mortgages more appealing. Interest rates have been at historical lows, and while opinions vary, few believe interest rates won’t rise over time — the question is more likely when.

Tip: It’s really difficult to successfully time interest rates. Going variable to save money in the short run — hoping to lock in a fixed rate “at the right time” — is really tough to do.

And what if interest rates rise? No matter which route you take, it’s crucial that you evaluate the impact of an increasing interest rate on your mortgage costs — a stress test, if you will. For example, if interest rates go up by two per cent, would you still be able to afford your monthly payment? It’s important to plan for the unexpected — you can start by building an emergency fund.

Not everyone prepares for a rise in interest rates. In fact, the main reason home-buyers offer for not considering a rise in interest rates is that they simply didn’t think of it (45 per cent) or didn’t realize it was something they should be doing (27 per cent). You can do better by preparing for multiple scenarios.

The next step

BMO mortgage specialists are here to work with you to help you make the right decision based on your needs and your lifestyle.

Looking for more information? Take our mortgage calculators for a spin, or view our latest rates and special offers.

 

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Mortgage solutions that are flexible and entirely tailored to your reality

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Amid the current housing environment and in light of the wide range of mortgage solutions available on the market, how can you select the product that is best suited to your particular situation?

 

Fixed or variable rate?

When faced with having to choose a mortgage solution, many wonder which is more financially advantageous: a fixed or a variable rate mortgage? Continue reading

A Diversified Mortgage Loan. It’s possible at National Bank!

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The concept of diversification is a crucial element to consider when investing. It is rooted in the very principle that investors should avoid putting all their eggs in one basket.

 

But why should the notion of diversification remain limited to investing? Why not adapt it to mortgages, the largest debt each of us will probably acquire in our lifetime?

 

To meet the needs and preferences of its clientele, National Bank offers the Made-to-Measure mortgage[1]. This solution allows you to divide your loan amount among several layers, depending on your profile, your financial goals, as well as your financing needs and preferences.

Continue reading

Fixed rates are gaining popularity

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According to a survey conducted on behalf of CIBC Bank at the beginning of March, 50% of Canadians would opt for a fixed mortgage rate today, compared to 39% last year.

At 32%, the popularity of variable rate mortgages has not changed. However, the percentage of people who are undecided has dropped considerably, from 30% last year to 18% this year. Conclusion: most Canadians who were undecided last year opted for a fixed rate given the stability of the interest rate.

Final result: just 6% of Canadians believe that mortgage rates will decrease over the next year, while 86% believe that they won’t change. If they do change, they will go up.

This is good news in the eyes of the CIBC, because it means that many owners took into account a potential increase in interest rates in their mortgage planning, which is a sign of caution. Continue reading

Less Weight on the Shoulders

Given the record debt of Canadian households, BMO Bank of Montreal suggests that owners opt for a mortgage loan with a 25-year amortization period.
“The shorter your mortgage, the less interest charges you’ll pay in the end. By choosing a 25-year amortization period, you free yourself from your mortgage quicker, and you can start to save more for your long-term objectives, such as financing your retirement,” the financial institution explains. Continue reading