“What’s your 5-year Fixed Rate Mortgage at right now?”. The question we, as mortgage brokers, get asked the most. But is a fixed rate mortgage the best option? Are there other options and is one better than the other?
There are 3 types of mortgage interest rate options you have available to you: Fixed, Variable, and Adjustable. Each of them has their own advantages and disadvantages. Using a licenced Mortgage Broker (Like True Mortgage) will help you understand which option will work best for your situation. Remember, your “bank” can only offer you one solution, where a broker will find you the best option for your needs.
Fixed Rate Mortgage:
With a fixed rate mortgage, your interest rate is set in for the length of your term (anywhere from 6 months to 10 years). This means that the interest rate and payment amount stay the same throughout the term. The payment is split up into two components, principal and interest (this is true for fixed, variable or adjustable-rate mortgages). As you make your regular payments, a portion of the payment is applied to the principal and a portion to interest. Over time, as you pay down your mortgage, more of your payment will be applied to pricipal and less to interest. However, the first 5-7 years of your mortgage have the highest amount going to interest. This is where a licensed Mortgage Broker can give you strategies to help pay down more principal. The advantage to the fixed rate mortgage is that you know the interest rate and payment will stay the same throughout the term. Some disadvantages are that fixed interest rates are generally higher than variable or adjustable interest rates, so you end up paying more in interest over your term. Also, if you choose to pay off your mortgage before the end of the term, the payout penalty will be higher than that from a variable or adjustable-rate mortgage.
Variable Rate Mortgage:
A variable rate mortgage is where the interest rate will fluctuate with the Prime Lending Rate throughout the mortgage term. The prime rate is determined by the Bank of Canada. Lenders generally keep their prime lending rate the same as the Bank of Canada, however, there are lenders that are known to keep their prime rates a little higher. You will usually see variable rates quoted as Prime “+” (premium) or “-“ (discount) a specific amount. The current Prime rate in Canada (as of July 1, 2021) is 2.45%. So, for example your variable rate mortgage may be “Prime – 0.8%” which means your mortgage rate would be 1.65% (2.45%-0.80%). While the prime rate may fluctuate over time, the premium or discount will stay constant over your term. Your payment amount stays the same throughout the term (like a fixed rate mortgage). However, the amount of your payment that goes to principal and interest could fluctuate depending on if the Prime rate goes up or down throughout your term. The main advantage of a variable rate mortgage is that you will likely pay less interest over the term of your mortgage compared to a fixed rate. This is because variable interest rates are usually lower that fixed rates. Also, if you were to pay off your mortgage before the end of the term, the penalty to do so is usually only 3 months worth of interest. The disadvantage to variable rate mortgage is that the rate could fluctuate during your term meaning a little more money goes towards interest rather than principal.
Adjustable-Rate Mortgage:
An adjustable-rate mortgage (often called an ARM) is identical to a variable rate mortgage with one key difference. The difference is that the payment amount fluctuates up and down with the interest. This is beneficial as it ensures you continue to pay down principal. If the rate goes up your payment goes up slightly to ensure the interest is covered and you continue to pay down the principal. All other aspects of an Adjustable-rate mortgage are the same as a variable rate mortgage.
These options may seem confusing, but they don't have to be. A licensed mortgage broker can help you make the right choice. Everybody’s situation is unique and the worst mistake you can make is to choose a mortgage based on what a friend or family member did with theirs. Work with a licensed mortgage broker and they can tailor a mortgage rate option to meet your needs and help you pay off your mortgage faster!
