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.”


Con­sider your in­come, life­style and risk tol­er­ance when choos­ing a mort­gage.

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