Fixed versus Variable
The decision to choose a fixed or variable rate depends on your tolerance for risk as well as your ability to withstand increases in mortgage payments. You can sometimes expect a financial reward for going with the variable rate, although the precise magnitude will ebb and flow depending on the economic environment.
Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.
A variable rate mortgage often allows the borrower to take advantage of lower rates -- the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage. For example, if the prime mortgage rate is 3.45 percent, the holder of a prime minus 0.50 percent mortgage would pay a 2.95 percent variable interest rate.
As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.
Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.
A variable rate mortgage often allows the borrower to take advantage of lower rates -- the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage. For example, if the prime mortgage rate is 3.45 percent, the holder of a prime minus 0.50 percent mortgage would pay a 2.95 percent variable interest rate.
As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.
- With a fixed rate mortgage, the interest rate is set so your mortgage payment will remain the same throughout the term of your mortgage. Fixed rates typically range anywhere from a 6 month term to a 10 year fixed rate term.
- With a variable rate mortgage, the interest rate is tied to what is known as the prime rate (currently 3.20%) and the prime rate fluctuates. Currently variable rate mortgages are typically offered as Prime less a discount, such as Prime - 0.75%. If the prime rate changes your mortgage payment will change accordingly. Even though the prime rate may fluctuate, the discount to prime will remain constant throughout the term.
Variable versus Fixed Comparison
Variable Fixed
Variable Fixed
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Description
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Fluctuates with the prime rate. If the prime rate changes the mortgage payment and interest rate change accordingly.
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Interest rate is set for the term. Mortgage payment and interest rate remains the same throughout the term.
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Pros
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Cons
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If you decide to choose variable please note the following:
Not only is it important to look at the variable rate, in my opinion it is EQUALLY OR MORE IMPORTANT to look at the lock-in policies. With a number of lenders you have to negotiate the rate when you decide to convert to a fixed rate mortgage and because they already have your business you do not have much negotiating power.
I email economic updates/prime rate changes to my clients on the variable rate so you are kept current and can make an informed decision if you decide to convert to a fixed rate and of course you can always call me to discuss. My clients really like the updates and please refer to "Testimonials" for reference in "About Us" section of this website.
I have a program that compares fixed rates to a variable taking into consideration potential prime rate increases. It would be a good idea to meet in person to go over your options in detail and at the same time we can go through some potential scenarios comparing fixed rates to variable. If you are interested in the variable rate then there is a good chance you will have a much better understanding of how it works after the meeting.
Not only is it important to look at the variable rate, in my opinion it is EQUALLY OR MORE IMPORTANT to look at the lock-in policies. With a number of lenders you have to negotiate the rate when you decide to convert to a fixed rate mortgage and because they already have your business you do not have much negotiating power.
I email economic updates/prime rate changes to my clients on the variable rate so you are kept current and can make an informed decision if you decide to convert to a fixed rate and of course you can always call me to discuss. My clients really like the updates and please refer to "Testimonials" for reference in "About Us" section of this website.
I have a program that compares fixed rates to a variable taking into consideration potential prime rate increases. It would be a good idea to meet in person to go over your options in detail and at the same time we can go through some potential scenarios comparing fixed rates to variable. If you are interested in the variable rate then there is a good chance you will have a much better understanding of how it works after the meeting.