Fixed vs Variable Rate.

Fixed Rate Mortgage

A fixed rate mortgage is a mortgage where the rate of interest is fixed for a specific period of time. This is known as the mortgage term, it usually ranges from between 6 months and 25 years. The most common terms are 3 to 5 years in length.

Variable Rate Mortgage

A variable rate mortgage is a mortgage where the interest rate fluctuates with changes to the prime lending rate as set by the bank of Canada. If the interest rate rises, your payments will also rise, but if rates decrease your payments also decrease.

 

Choosing the Right Mortgage Product

There are pros and cons of both Fixed and Variable Rate Mortgages, and the most important thing is to know which one is the most suitable for you.

There is some risk associated with a variable rate mortgage; you need to assess your ability to service the mortgage in the event that rates do rise. If you like to keep a strict monthly budget and know what all your payments will be, cannot handle an increased payment, or can’t sleep at night knowing that your rate may change by .25%, then a variable rate mortgage may not be the best option for you.

Some studies suggest that from a historical perspective, a variable rate is the best option when it comes to financing. Just keep in mind that no one can predict exactly where rates are going and none of the economists who make predictions will be making your mortgage payments.