How does someone choose between fixed and variable rates? As you may already know, we are currently in an increasing rate environment with both fixed and variable rates. I’m often asked to explain the difference between how fixed and variable rates work, and how the rising rates impact mortgage payments. Here is a quick explanation of how those rates work.
Fixed rate:
Choosing a fixed rate means that your mortgage payments remain the same throughout the length of your mortgage term, even if rates increase.
Variable rates:
With variable rate mortgages, your interest rate and payments fluctuate with the bank’s Prime lending rate. The Prime rate has already increased twice this year, once in March for 0.25% and once in April for 0.50%, and the Bank of Canada has announced that more increases are expected later this year. Generally, for each rate increase of 0.25%, your mortgage payments would increase by around $12 per $100,000 owed.
Although historically variable rates have been lower than the fixed interest rates, allowing home owners to have a lower payment, there is no guarantee that a variable rate will not rise. The potential reward to a variable payment is that you can have lower monthly payments. An option some people choose is to pay the same amount every payment as you would with the fixed rate and then your mortgage could be payed off sooner as the amount you pay towards your principle would change. For example if your fixed rate payment would be $1,500/month and your variable payment would be $1,350/month if you chose to pay $1,500/month instead then you could take years off your mortgage. This is especially true at the beginning of your term, when the majority of your payment is servicing the interest instead of the principal.
Making the decision between a fixed or variable rate depends on your unique situation and preferences. In order to have peace of mind, I recommend obtaining a pre-approval before you start shopping for a house so that rates can be held for you (typically for a period of 90-120 days). Contact me for a free – no obligation consultation to discuss the best option for your mortgage.
Katelyn Palmer
Scotiabank Home Financing Advisor
613-218-3028
Katelyn.palmer@scotiabank.com