Should I Choose a Fixed or Variable Rate Mortgage?
If you are applying for or renewing your mortgage, should you choose a fixed or variable rate mortgage? The current economic situation can play a role in your decision.
Fixed Rate Mortgage
A fixed rate mortgage means the mortgage rate and payment you make each month stays the same throughout the entire term of your loan.
Fixed rate mortgages may be a better option if interest rates are low, and you are a person that prefers to budget for stable, consistent payments.
It is important to note that the initial interest rate of a fixed rate mortgage is often higher than that of a variable rate mortgage, and if you break your mortgage contract (e.g. by missing a payment i.e. defaulting), the penalties may be greater than if you had a variable rate mortgage.
Variable Rate Mortgage
A variable rate mortgage means the mortgage rate and payment you make each month may change depending on the prime rate posted by your financial institution.
The prime rate is the rate commercial banks charge their most creditworthy customers and this rate is based on the key interest rate issued by the central banks. The variable mortgage rate is typically stated as the prime rate plus/minus a percentage.
It is important to note that although the initial interest rate of a variable rate mortgage is often lower than that of a fixed rate mortgage, sometimes enabling you to qualify for a larger loan, interest rates can increase during the term of your loan if the prime rate increases and in these circumstances your monthly mortgage payments would increase too
Can I Change My Fixed or Variable Mortgage Rate Decision?
While it is not possible to convert a fixed rate mortgage into a variable rate mortgage without breaking the mortgage contract, you can typically convert a variable rate mortgage to a fixed rate mortgage at any point during your mortgage term.
The caveat is that your current variable rate does not become your fixed mortgage rate. Lenders will offer you the fixed rate available at the time, which can be higher than when you took out your mortgage.
Should I Choose a Fixed or Variable Rate Mortgage?
The current economic situation can play a role in choosing the most advantageous option for you. While a variable rate mortgage may be appealing because the initial interest rate offered is typically lower, if the prime rate rises, you could end up paying more than you have anticipated.
So far, in 2022, for instance, central banks hiked interest rates to tame inflation, affecting mortgage rates – with no guarantee that rates won’t continue to rise.
On the other hand, if having your mortgage payment stable and consistent throughout the term of your loan is important to you, a fixed mortgage rate may be best for you as having a peace of mind has a personal value that cannot be quantified.
At the end of the day, each person is unique when it comes to personal finances and risk tolerances and you should consult with an experienced mortgage professional to discuss your particular circumstances.
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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.