What's the difference? Which one should you choose?
Let's explore the key differences between these two popular options and help you make an informed choice tailored to your financial goals.
Fixed Rate Mortgage
Fixed rate mortgages provide stability and predictability, making them a popular choice among risk-averse borrowers, providing a peace of mind.
Interest rate and mortgage payments remains constant throughout the mortgage term. This can be beneficial in a market with fluctuating rates.
Depending on the mortgage product, the penalty for fixed rate mortgages are generally higher between the interest rate differential (IRD) or 3 months interest. Therefore, penalty may usually higher compared to variable rate mortgages.
Variable Rate Mortgage
Variable rate mortgages come with a level of flexibility tied to market conditions. Flexiblity can lead to potential savings during periods of lower interest rates, this also has an element of uncertainty. If rates go up, then more interest is paid.
Interest rate fluctuates based on changes to the mortgage prime lending rate.
Depending on the mortgage product payments may change when mortgage prime rate changes. Some products will adjust the amortization until rates reach a trigger rate before the mortgage payments are adjusted.
The penalty for variable rate mortgages are generally 3 months interest. Therefore, penalty is usually lower compared to fixed rate mortgages.
Factors to Consider
Mortgage Product: There are many different types of mortgage products available. Lowest mortgage rates may not always be the best options. Some products may have less flexibility, restrictions, fees, etc. It is best to understand the product rather than just shopping for the best rate. Sometimes borrowers may end up paying more on lower rate products, due to fees and/or penalties.
Comfortability: Understanding your risk tolerance is key. If you prefer a steady, unchanging payment structure, a fixed rate might be your preferred choice. If you're comfortable with some level of rate changes and want to take advantage of potential interest rate drops, then a variable rate could be appealing.
Financial Planning: Getting the right mortgage is an important part of your financial goals. If knowing the exact mortgage payments for the entire term, a fixed rate aligns with stability. Conversely, if you are comfortable with some variability and seek potential cost savings, a variable rate might be worth considering.
Choosing between a fixed or variable rate mortgage ultimately depends on your unique financial situation, preferences and market conditions. Assess your comfortability, consider your financial goals and stay informed about market trends to make a decision that aligns with your homeownership journey.
When in doubt, consulting with a knowledgeable mortgage professional can provide valuable insights tailored to your specific needs. Let us help guide you through your search. Understanding the nuances of fixed and variable rate mortgages empowers you to make a decision that supports your financial well-being.
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