A Look at Variable Vs Fixed
Rate Mortgages
When choosing a mortgage, one of the most critical decisions a homeowner can make is whether to opt for a fixed or variable-rate mortgage. Each has its own set of advantages and potential drawbacks, influenced by broader economic factors and personal financial situations. Let’s dive in and take a look at the differences and which type could be suited for you.
Fixed-Rate Mortgages
A fixed-rate mortgage offers an interest rate that remains constant throughout the loan whether it be one or a five year term contract. This stability means your monthly payments will not change, making it easier to budget and plan for the future. However, fixed rates can remain high at times, especially when long-term Treasury rates rise or are elevated in value. This is because mortgage rates often track the yields of government bonds, such as the 10-year Treasury note. When these yields increase, lenders raise fixed mortgage rates to align and maintain their profit seeking margins.
As fixed rate mortgages offer a predictable payment and protect against rising interest rates, they can have higher initial rates compared to variable-rate mortgages. Potentially leading to higher overall costs for the term if the Central Bank decreases rates during that term.
Variable-Rate Mortgages
Variable-rate mortgages (VRMs), also known as adjustable-rate mortgages (ARMs), have interest rates that can fluctuate over time. These rates are typically tied to a benchmark interest rate, such as the prime or base rate, which is influenced by central bank policies. When central banks cut rates, variable mortgage rates tend to decrease as well, making them more attractive in a declining interest rate environment.
Types of Variable-Rate Mortgages
*Standard Variable Rate (SVR)*: The rate can change at any time, usually at the lender’s discretion. Mortgage lenders set their own SVR rates and can vary from one to the other. This, along with your mortgage repayments, can go up or down at any time. Although the SVR can be influenced by changes in the Central Bank’s interest rate, unlike tracker mortgages, SVRs don’t track above the base rate at a set percentage.
*Tracker Rate*: A tracker mortgage is a type of variable rate mortgage which follows a base rate – usually the Central Bank’s interest rate. If you get a tracker mortgage, your mortgage repayments (including the interest you pay on your mortgage) could change every month. Tracker mortgages are flexible and don’t lock you into a fixed rate, however tracker variable rates are usually lower than the lender’s standard variable-rate.
*Discount Rate*: Offers a discount off the lender’s SVR for a certain period. Discounted rates are just a percentage off of the SVR rate for a set period of time. For example, if a lender’s variable-rate was 4%, they might offer a 2-year discount of 1% giving you a payment-rate of 3% for the first two years of the term.
*Capped variable-rate mortgage (Capped VRM)*: This type of variable-rate mortgage limits the interest rate to a set threshold when the mortgage is taken out. The rate will fluctuate based on the market, but it will never go above that threshold rate.
While variable rate mortgages (VRMs) usually allow you to lock in to a fixed rate at any given time, it would be better for your pocketbook to lock in at the best posted rate possible if the Central Bank’s interest rates are projected to go up.
Variable Rate mortgages usually offer lower initial rates compared to fixed-rate mortgages. Potential savings can be had over and above fixed rates, if the Central Bank’s interest rate falls.
The risk with VRMs are the uncertainty in monthly payments due to the rising and falling of the lender’s rate. Higher payments can be expected if interest rates rise above the standard variable-rate in some types of Variable-Rate Mortgage contracts. It’s always a great idea to research whether interest rates are projected to decrease, stay flat, or increase in the coming years if considering a variable mortgage. Also, keep in mind that national and foreign uncertainties like rising oil prices, can influence the Central Bank’s interest rates as well, as they fight inflationary pressures.
In Canada, the choice between fixed and variable rates can significantly impact your financial situation. Historically, variable rates have been lower than fixed rates, but this can change based on global or national conditions. For instance, during periods of stability, variable rates might offer substantial savings. However, in times of uncertainty and possible rising interest rates, fixed rates can provide the security of consistent payments homeowner’s are looking for.
Current trends show that fixed rates tend to be higher due to the current high yields on long-term Treasury bonds. While variable rates have been decreasing as central banks, like the Bank of Canada, implement rate cuts to keep inflation in check.
So which do you choose as a homeowner? Fixed-rate mortgages are ideal if you prefer stability and predictability in your payments month to month. However variable-rate mortgages are suitable if you are comfortable with some risk and want to take advantage of potentially lower rates in the coming months or years.
Ultimately, the best choice depends on your financial situation, risk tolerance, and expectations for future Central Bank interest rates. Consulting with a financial coach can help tailor the decision to your specific needs.
If this article helps clarify the differences between fixed versus variable rate mortgages and how they might fit into your financial plans. While you have more questions or need further assistance, feel free to contact me as we’re here to help you though these difficult times. We offer free initial consultations followed by competitive rates and flat fee options for sensitive situations. Don’t hesitate and reach out today by going to Scottzworld.com and using our contact page.
