Fixed rate vs vari­able: mak­ing the de­ci­sion

Metro Canada (Calgary) - - SPECIAL REPORT: MORTGAGES -

Un­less you have a crys­tal ball to con­fer with, know­ing whether it’s fi­nan­cially ad­van­ta­geous to choose a vari­able-rate mort­gage over a fixed-rate mort­gage can feel like a daunt­ing task.

In fact, ac­cord­ing to Andrew Roper, a mort­gage bro­ker with Do­min­ion Lend­ing Edge Fi­nan­cial, be­cause the of­fer­ings for each prod­uct are quite dif­fer­ent, de­cid­ing which op­tion to take on or re­new should al­ways boil down to three main cri­te­ria: your in­come, life­style and over­all risk tol­er­ance.

While many Cana­di­ans tend to favour sta­ble, fixed mort­gages — 51 per cent of home­own­ers opted for a five-year fixed rate in 2015 — a host of eco­nomic ex­perts tout the mer­its of vari­able mort­gages when it comes to of­fer­ing the big­gest long-term ad­van­tage, cred­it­ing them with be­ing the cheaper op­tion over time.

“It used to be that short-term vari­able-rate mort­gages were by and far the most pop­u­lar choice for home­own­ers, but re­cent changes in in­ter­est rates have made fixed rates more com­pet­i­tive, which makes de­cid­ing be­tween the two that much more dif­fi­cult,” Roper says.

And, while so much of the se­lec­tion process is about per­sonal pref­er­ence, “the life sit­u­a­tions a per­son or cou­ple are ex­pe­ri­enc­ing or will po­ten­tially ex­pe­ri­ence — think mar­riage, hav­ing a child, chang­ing jobs, re­tir­ing — ne­ces­si­tate se­cur­ing a mort­gage ide­ally suited to those needs,” he adds. “It’s a process where the pros and cons as­so­ci­ated with each mort­gage type should be weighed very care­fully.”

How can you de­ter­mine which op­tion is best for you? With vari­able-rate mort­gages, the ap­peal is that your pay­ments go up or down based on changes to the prime rate, which is cur­rently set at 2.7 per cent by the Bank of Canada. In re­cent years, in­ter­est rates have been lower than that of fixed-rate mort­gages, al­low­ing for more of your monthly pay­ment to be ap­plied to the prin­ci­ple of your home. The draw­back: Since mort­gage pay­ments fluc­tu­ate ac­cord­ing to the prime rate, this means that a hefty in­crease in said rate will in­crease your in­ter­est pay­ments, as well.

Fixed rates are a dif­fer­ent story. Un­like vari­able rates, these are set for the length of the agreed upon term of your mort­gage. Mean­ing if you have a five-year fixed rate at 2.5 per cent, you’ll know ex­actly how much prin­ci­pal and in­ter­est you’ll pay on each mort­gage pay­ment based on the term cho­sen. The draw­back: Should in­ter­est rates drop, you’re locked in to pay­ing the higher rate un­til your fixed term is com­pleted.

What are your mort­gage goals? If you haven’t al­ready, de­ter­mine what your long- and short-term goals are, how long you plan to live in your house, and if you’re try­ing to pay off your mort­gage quickly, of if hav­ing a re­li­able monthly cash flow is more im­por­tant to you.

“Talk­ing through these points and then speak­ing to an ex­pert about them is vi­tal be­cause it puts you in a bet­ter po­si­tion to select which mort­gage pro­gram is ideal for you,” says Roper. “Hav­ing this kind of dis­cus­sion will also open the door to a host of re­lated top­ics, such as flex­i­ble pay­ment op­tions, yearly ad­di­tional pay­ments to your mort­gage and the guide­lines that sur­round them.”

IS­toCk

When de­cid­ing up on what type of mort­gage is best for you, ex­perts rec­om­mend con­sid­er­ing three main cri­te­ria: life­style, in­come and over­all risk tol­er­ance.

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