Fixed Rates

This is the most popular rate and is heavily supported by the banks. When choosing a fixed rate mortgage, you agree that your interest rate will be fixed for a term of 6 months to 10 years.  The most common being a 5-year term. 

Even if the market rates take a turn after you have signed your mortgage commitment your payment will not change at all. Your rate is guaranteed for the remainder of your term. It is common for the fixed rate to be higher than the variable.

Variable Rates

This rate is not guaranteed and can change as the market changes. The variable rate is an element (either plus or minus) to the current prime rate. If the prime rate currently sits at 2.85% and the variable rate is prime minus .45% your effective rate would be 2.40%. If the prime rate goes up by .25% then your rate would move up to 2.65%. The common term for a variable rate mortgage is 5 years, but some lenders will allow shorter terms.

Most believe that the fixed rate is the safe bet even though they pay more to lock in. The variable rate is viewed by most to be the wild card which is unpredictable and risky. This, however, isn’t always the case. Most people don’t realize that both types of mortgages have very different ways of calculating the penalty should you ever need to exit out of your mortgage early.

If you ever need to get out of your variable rate mortgage, regardless of your term, you will end up owing the lender 3 months’ worth of interest which is roughly around 2.5 monthly payments. That is not a large amount if you look at the alternative. 

Within a fixed rate mortgage, you will likely pay the larger amount of either 3 months interest or what they call an interest rate differential penalty. Every lender has their own way of calculating interest rate differentials, and the way they do that is usually based on market changes, as well as the remaining time left on your term. There is no sure-fire way to guess the amount they will charge you for this penalty. Whatever it turns out to be, it will not be pleasant. Commonly, there has been penalties 10x the amount with a fixed rate mortgage compared to a variable. There are good reasons behind why the banks like to see people choose a 5-year fixed rate mortgage and financial gain is one of them.

Your overall goal when choosing a mortgage should always be to pay the least amount of money to the lender as possible. Fixed rate mortgages may provide you with a predictable payment but if life changes occur and you are forced to break your mortgage early you could end up paying far more than choosing a variable rate mortgage from the get-go.

Consider the fact that the Bank of Canada has suggested that rates will remain low for the projected years ahead making chances of a significant increase in the prime rate very low.

Please contact us if you would like to go over which option would be best for you and your current situation. We are always happy to answer any questions you might have big or small.