What are the pros and cons of a fixed or variable mortgage?
There are several factors to consider in deciding what the best mortgage is for your situation - the pros and cons of a fixed or variable mortgage is just one.
Variable Rate Mortgage
With a variable rate mortgage, the interest rate is set monthly by the financial institution and fluctuates with the prime lending rate. When the interest rate changes, your monthly payments may stay the same and the amount of interest you pay changes, or your monthly payments may change. There is a higher level of uncertainty that may cause anxiety if rates increase and you’re on a fixed budget.
Fixed Rate Mortgage
With a fixed rate mortgage, the interest rate is set for the term of the mortgage. That means that your monthly payments will be the same regardless of the change in the prime lending rate. Because there is no uncertainty, it offers you peace of mind and security for the term of your mortgage. However, the rate of interest is usually higher than a variable rate mortgage and the extra interest costs may not be worth the premium.
What factors should be considered when deciding on the best type of mortgage?
Factors to consider include:
- Your budget
- Risk tolerance
- Interest rate fluctuations
- How long you plan to be in your home
- Future goals.
Take a look at your budget in order to figure out how much you can afford to pay each month. The recommended percentage is between 30% and 35% of your take home income.
Tolerance for risk is a very personal consideration. Do you prefer knowing what you’ll pay each month even if you end up paying more in the long run or can you handle the uncertainty due to fluctuations in interest rate?
If rates are going down, then you may want to consider a variable rate and to take advantage of lower interest costs. If rates are increasing, then it will depend on your budget and how much additional payment you can afford. As rates increase so will your mortgage.
How long do you plan to be in your home? Based on current interest rates, if you plan on being in your home for the next five years, a 5 year fixed rate is a good choice. If you know that you will stay in your home for only a year or two, then a variable rate mortgage may work better because if rates started to increase dramatically, you could always lock into a fixed term at that time. This would provide you with flexibility when the time to move comes.
What are you future goals? While you’ll always have housing costs, you may want extra cash to put towards achieving other financial goals, such as saving for retirement or a family vacation. In this case, you may want to consider locking in your mortgage to a five year term. It is important to be able to afford your home and pay off your mortgage but make sure that you are enjoying your journey along the way and not just paying off your debt.
It’s important to work with a qualified advisor to discuss your situation to determine the option that will best suit your needs, both now and in the future.Top of page