The benefit to fixed rates is that they offer certainty in your monthly payment. You can be sure that what you pay tomorrow will be the same you’ll pay for the entirety of your mortgage term. On the other hand, variable rate mortgages tend to be lower than fixed rates, but are the riskier of the two mortgage choices. Variable rates increase or decrease along with the prime rate. Your income, lifestyle and risk tolerance may weigh on your decision and will inevitably determine which mortgage product suits your family’s needs.
The greatest appeal of variable rate mortgages is that the interest rate is typically lower than fixed rate mortgages. Understanding the risk is a necessity before moving forward. Without warning, interest rates can increase. What you want to ask yourself is, “If rates were to increase by as much as 2%, could we still afford the payment?” and “Would we still be able to sleep at night?” If you answered yes to both questions, then you may be OK to consider a variable rate mortgage.
The gap between variable and fixed rates have narrowed in recent years. For example, at the time of this writing, TD Canada Trust offers a 5-year variable closed rate at 2.34%, whereas their 4-year fixed closed rate is at 2.47%. Given only a 0.13% rate reduction, many will find it’s not worth the risk to go with a variable rate, and prefer to lock in at the 2.47%.
It goes without saying, the lower the rate, the lower your payment. If you had a $300,000 mortgage at 2.47%, amortized over 25 years, you can expect a payment of approximately $1339/mos. The same mortgage amount and terms, at a rate of 2.34% lowers your payment to approximately $1320/mos. The question you want to consider is, “Does saving $19/mos. make the risk worth it?” Most will agree, this is a minimal price to pay for security and peace of mind for years to come.
Some people may choose a variable interest rate with plans to watch the rate and convert it when rates start to rise. Keep in mind, when you convert your mortgage to a fixed rate, you convert it at the rate at the time of conversion. If rates start going up, they’ll likely rise faster than they come down. It’s imperative you speak with your mortgage broker about what options you have to convert your mortgage as all mortgage products differ slightly.
You also want to consider the length of your mortgage term. The length of time you plan to live in the property will have a bearing on the length of your mortgage term. If you don’t plan to stay for at least 5 years in your home, you may want to choose a 3 or 4 year fixed mortgage to avoid high payout penalties. The standard penalty to pay out a fixed rate mortgage is either three months’ interest or an interest rate differential, whichever is greater of the two. Though the average length of a mortgage term is 5 years, 3 and 4 year fixed rates have become more attractive. Options are limited for variable rates with terms less than 5 years, and the rate tends to increase quite significantly.
So what option is best for you? Consider what amount each month is worth your peace of mind. If you were buying a property or renewing your mortgage today, most would agree a fixed rate is the preferred option. Before deciding with certainty speak to your mortgage broker to get his or her professional advice. If you don’t already have a mortgage broker, contact Marc Beaulac at 780-232-2265.
Jason Rustand with RE/MAX Real Estate serves with the highest level of integrity and excellence every time. For more info on this topic or others related to real estate contact LIKE our Jason Rustand Team Facebook page, call Jason direct at 780.919.0004, email firstname.lastname@example.org or visit WeSellLeduc.com