If you’re not familiar with the mortgage industry (don’t sweat it, many people aren’t), then you likely won’t know the details of how a fixed mortgage differs from a variable mortgage - and that’s okay, because today we’re going to help unpack what each of these mortgage loan options mean to you.
This is actually one of the financial industry’s most frequently asked questions from clients: What are the key differences between a fixed and variable mortgage? There are a few main features to consider to make sure you’re choosing the best mortgage product for YOUR individual real estate needs. Let's take a look at each option below.
FIXED RATE MORTGAGE
The main difference between the rates of fixed loans versus variable loans is that a fixed rate mortgage has a set interest rate and predetermined payments for the duration of your term, regardless of what’s going on in the economy and with the ever changing rates. With that being the case, fixed rates typically equate to less risk, as you generally know what to expect.
As well, each of your mortgage payments get put towards paying off the principal loan amount and the interest combined. How this works is that although your monthly payment remains the same, the percentage of each payment that gets applied to the principal amount and the interest owing varies as you pay down your mortgage. In the earlier years of a fixed rate mortgage, more of the monthly payment is allotted to interest, so don’t feel frustrated if you feel you’re not making a dent in the balance of the loan in years 1, 2 and 3.
Clear as mud, right? Think of it this way: the loan amount and the interest amount actually have an inverse relationship; the interest you pay each month will slowly decrease as the principal loan gets paid down.
VARIABLE RATE MORTGAGE
Variable interest rate mortgages correspond with the bank's prime rate; meaning the mortgage rate will change when the Bank of Canada modifies the overnight lending rate. So what causes the Bank of Canada to revise the rate? Well, it's shaped by the cost of borrowing for the major financial institutions in Canada.
The way this works is that banks take the overnight lending rate and then adjusts a percentage to it; this amount is set by each individual bank, which ultimately determines your variable interest rate. This is the reason why your monthly mortgage payment could fluctuate over the term of your mortgage, depending on what’s happening with the prime rate from the central bank and what’s happening within the economy. Historically, variable interest rate mortgages have been lower than fixed rates, but many unique factors need to be considered.
WHICH IS BEST FOR YOU?
When choosing the best mortgage for your Comox Valley home, it will come down to personal and economic variables. Your tolerance to risk, your budget, your plan for how long you’ll stay in the home and current interest rates, among other things, all play a role in your decision.
Having experienced these unprecedented times over the last year, it's important that you discuss fixed versus variable mortgage rates with a professional mortgage broker. If you have any questions, email firstname.lastname@example.org or call 250.702.6493 – I’d be happy to connect you with professionals in the Courtenay area lending industry, and beyond, who best suit your unique needs.