When financing a home, borrowers are presented with a crucial decision: to opt for a fixed or variable-rate mortgage. Each option has advantages and considerations, underscoring the importance of comprehending their fundamental distinctions before committing.
This comprehensive comparison delves into the features of fixed-rate and variable-rate mortgages, how they affect the interest paid in the short and long term, and the structure of payments. Considering various factors, including your unique financial situation and the prevailing economic climate, will play a pivotal role in shaping your choice.
By the end of this exploration, you will have a clearer understanding of which mortgage type best aligns with your financial aspirations and preferences, enabling you to embark on your homeownership journey confidently and well-informed.
What is a Fixed-Rate Mortgage?
Fixed-rate mortgages are a specific type of home loan that offers borrowers a constant interest rate during their mortgage term. This means that borrowers will consistently make the same monthly mortgage payments from the initial agreement until the end of the loan term. Regardless of fluctuations in prime interest rates, the interest rate on a fixed-rate mortgage remains unchanged, providing stability and predictability. These qualities make fixed-rate mortgages appealing to individuals seeking a reliable and manageable payment structure over the long haul.
What is a Variable-Rate Mortgage?
A variable-rate mortgage is a type of home loan in which the interest rate varies over time, influenced by the bank’s prime rate, which, in turn, is affected by fluctuations in the Bank of Canada’s overnight rates. Unlike fixed-rate mortgages, the interest rate on a variable-rate mortgage is not fixed for the entire loan term. Instead, the rate is determined as a percentage above or below the prevailing prime rate (e.g., prime – 0.35%).
While the prime rate may change over time, the specific variance from the prime rate (e.g., -0.35%) will remain constant throughout your mortgage term. As the prime rate moves, your mortgage interest rate will adjust accordingly by the set percentage above or below the prime rate, resulting in changes to your monthly mortgage payments.
Pros & Cons of Fixed-Rate Mortgage
- The interest rate and monthly mortgage payments will stay consistent over the term of your mortgage.
- It is safeguarded against fluctuations in the prime rate.
- Ideal for individuals seeking to secure a favourable interest rate and maintain stable payments, irrespective of future market rate fluctuations.
- Compared to the initial rate of a variable-rate mortgage, the starting interest rate for a fixed-rate mortgage is typically higher. (*At times, it can also down to lower levels during certain periods.)
- Do not benefit from any decrease in market rates.
- In specific scenarios, borrowers with fixed-rate mortgages may incur a higher total interest cost over the loan term when compared to variable-rate mortgage holders. This is because they are bound to a higher rate, even if market rates experience a decrease.
What Is The Current Fixed Mortgage Rates?
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Pros & Cons of Variable-Rate Mortgage
- Variable-rate mortgages frequently present lower initial interest rates in comparison to fixed-rate mortgages (*At times, it can also rise to higher levels during certain periods.)
- If market interest rates decrease over time, borrowers with variable-rate mortgages can benefit from lower monthly payments.
- Variable-rate mortgages can prove advantageous for individuals who intend to sell or refinance their homes quickly.
- Since the interest rate is linked to market fluctuations, borrowers are exposed to the risk of rising interest rates, resulting in potentially higher monthly payments.
- Borrowers may have to modify their financial plans to accommodate possible increases in monthly mortgage payments.
- The possibility of substantial rate increases over time can lead to higher overall interest costs compared to fixed-rate mortgages.
What Is The Current Variable Mortgage Rates?
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