Today, we discuss about Fixed rate vs Variable rate mortgage. The fixed term, meaning interest rates are fixed, term is fixed, no changes. You’ll agree to a certain term, you agree to a certain percentage amount that is not gonna change within your term. Doesn’t matter if rates go up, rates go down, you are locked in. It would vary, so it could be that the term is fixed for example for five years. The rate might vary, it might go up and down depending on where the economy is Variables are more dependent on prime rate. The overnight lending rate to the bank of Canada will set, then your bank will have a prime rate based on that.
Fixed rate vs Variable rate mortgage
So, if your prime rate goes up, your interest rates will go up. If your primary goes down your interest rates will go down and subsequently, if your rates go up and down, your mortgage payments are affected based on that.
Your principle portion might get affected if you’ve not adjusted your payment, because interest rates have gone up, and now more is going towards interest towards principal. So, you want to kind of stay on top of that.
With variable, it is subject to change and it could be maybe not ever in the first five years depending on where the bank of Canada is or the economy is or it could be changing quite a bit it could fluctuate maybe on a yearly basis. It’s hard to say, but definitely something that you want to be cognizant about and keep your eye on, which is on the variable rate. So it seems to be a great year. We’re seeing a lot of movement in rates, more on the fixed side though not on the on the variable side. Now fixed rates are actually calculated differently compared to the variable rate.
Fixed rates are based on the bond market. ten year bonds actually trading at a very very low level. That’s the reason why we’re seeing quite a bit of a decline in fixed mortgage rates. So, I’ll give you an example, so January of this year we were sitting at rates around 3.49 and as of now, we’re seeing rates come down to as low as 2.69 in some places, that is a big difference. We’re expecting rates to drop further it might even go down a lot lower than that. seen prime rate change at all. So, every quarter or every couple of months, the bank of Canada will come out and reassess the situation, where the economy is heading. Here we adjust our overnight rate or should we adjust interest rates that kind of combat inflation or whatever it is.’ As of right now they haven’t decided to change anything.
There are some talks that there might be a decrease by the end of this year, but once again just speculation, we don’t know.If you’re deciding right now you’re buying a home “should I go with fixed? Should I go with variable?” it also just depends on your scenario and depends on how comfortable you are with taking risk because there is some risk associated with variable. You could go with a fixed rate today and decide “hey I’m comfortable with this is a 2.79, 2.69 rate. I would actually go with a fixed rate. So, it doesn’t bother you. thinking “wait a minute there’s a possibility variable rates might go down, but there’s also possibly the fixed rates might go down even further. In a variable, there is something built into a variable mortgage that a fixed mortgage doesn’t have. With the variable mortgage you can lock into a fixed mortgage at any time without any penalties as long as the term that you’re currently in is the same or greater. So let me give you an example so you start off with let’s say a 5-year variable rate.
You’ve kept it for one year, You have four years remaining on your term. You could lock in to a four-year mortgage term or five-year mortgage term or a six year mortgage term. Anything higher than what you currently have at any time without penalties Sometimes I’ve advised my clients to do that, thinking “hey listen you guys are willing to take a little bit more risk, go with the variable today”. I did that around February time and a lot of my clients took my advice and they’re very happy for it. So, we got them into a variable around February time, and fixed rates at that time were a little bit higher. They were 3.49, and now rates have come down a 2.79 my clients have actually gone and switched from that variable to I fixed and locked in their rate for 2.79.
At that time if they’d taken it it would have been 3.49 so it’d have been a little bit higher so depending on your scenario, depending on how comfortable you are with taking a risk. All our conversations, you need to have with your lender but a very important conversation to have, because it could totally change your mortgage payment. It could change budgeting, going between a fixed or variable rate. There’s pros and cons to both. As of right, now I would kind of have the conversation with your lender but we’re going through a very exciting time where rates are actually coming down. We had a little bit of a scare last year where it’s had gone up as high as 3.69. So, it’s really good to kind of feel like we’re not in that environment.