Find a mortgage that works in your favour
Fixed rate or variable? It’s a personal preference
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 Toronto-based 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 variablerate 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? Here are a few factors to consider.
The difference between variable and fixed mortgages 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, or 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,” Roper says. “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, as well as portable mortgage options to consider if you move before your term is up.” What’s your financial risk-taking comfort level? Potentially the most important question to ask yourself in this process is which option will provide you with the most peace of mind, says Dilys D’Cruz, vice-president of community banking at Meridian Credit Union for retail, wealth and small business banking. She offers these prompts to help expedite the decision-making process: “Do you like the certainty of knowing that you have a fixed payment/rate regardless of what rates are doing? Or are you comfortable taking some risk to get a potentially better, lower rate if rates start to decline? And if so, will you be able to sleep at night knowing your rate could go up at any time?”
A key question to ask yourself is which of the options will provide you with the most peace of mind
In a nutshell, variable mortgage holders need to be OK with fluctuating rates, she says. If you’re riskaverse or concerned that potential interest rate hikes could derail your financial stability, a fixed option may be the best option for you. The bottom line ... Do your research, but don’t underestimate the importance of seeking out expert advice. “There are many benefits to both types of mortgages, but this is where speaking to an adviser at your local credit union or financial institution to work through various scenarios and show you potential cost savings is worthwhile,” D’Cruz says. “They will ask you the right questions to determine what your risk tolerance is, and help you choose the mortgage that best suits your needs.”