Mastering Fixed Rate vs. Variable Rate Mortgages: The Ultimate Guide in 2024!
Variable-rate & Adjustable-rate mortgages
VRM’s (Variable Rate Mortgage) & ARM’s (Adjustable Rate Mortgages) are based on the prime rate in Canada. This means that the amount of interest you pay on your mortgage could go up or down, depending on the Prime.
When considering a variable-rate mortgage, some individuals will set standard payments (based on the same mortgage at a fixed rate). This means that should Prime drop and interest rates lower, they would end up paying more to the principal as opposed to paying interest. If the rates go up, they simply pay more interest instead of directly to the principal loan.
Other variable-rate mortgage holders will simply allow their payments to drop with Prime Rate decreases, or increase should the rate go up. Depending on your income and financial stability, this could be a great option to take advantage of market fluctuations.
Additional Factors
Keep in mind, your rate is not the only component that influences your mortgage. If you’re looking to get a mortgage, these are some other important aspects that you should consider:
- Term: The length of time that the options and interest rate you choose are in effect. A shorter term (5 years) allows you to make changes to your mortgage sooner, without penalties.
- Amortization: The length of time you agree to take to pay off your mortgage (usually 25 years). This determines how the interest is amortized over time.
- Payment Schedule: How often do you make your mortgage payments? It can be weekly, every two weeks, or once a month and will affect your monthly cash flow differently depending on your choice.
- Portability: An option that lets you transfer or switch your mortgage to another home with little or no penalty when you sell your existing home. Mortgage loan insurance can also be transferred to the new home.
- Pre-Payment Options: The ability to make extra payments, increase your payments or pay off your mortgage early without incurring a penalty.
- Penalty Calculations: Where variable rates typically charge three-year interest, a fixed-rate mortgage uses an Interest Rate Differential (IRD) calculation. This can add up quite quickly! In fact, in some cases, penalties for breaking a fixed mortgage can sometimes be two or three times higher than that of a variable rate.
- Open versus Closed: An open mortgage is similar to pre-payment options, allowing you to pay off your mortgage at any time with no penalties. A closed mortgage, on the other hand, offers limited to no options to pay off your interest in full despite often having lower interest rates.
Looking at all the areas will ensure that you get the best mortgage product for YOU with the options that you need from pre-payment privileges to portability.
