Fixed vs Variable Rate Mortgage – What’s the Better Choice and Why?
In today’s market, variable and fixed rates are not too far apart. This makes most people think that the fixed rate is the way to go as it’s often viewed as the safest option.
Many believe that variable rate mortgages are for the daring and at any time your rate could double leaving you high and dry in the cash flow department. Many don’t realize that isn’t the truth at all.
The great thing about a variable rate is you have the option to lock into a fixed rate at any time you start feeling panicky, but I can assure you your interest rate will not be doubling over night. Even if your rate did go up by .25% the savings you would have already earned would put you on level playing ground, or you’d possibly still be in the lead.
Over the last 40 years variable rate mortgages have proven themselves to be the better choice for saving money and flexibility. I would also say that you’ll be given ample warning in the news and media that the Bank of Canada is planning a move on rates. When the rate does increase, I’m certain it will be slowly creeping up with just a quarterly rate increase at a time.
Where you’ll save the most money choosing a variable rate compared to a fixed rate is with the penalty.
With a variable rate, you’ll only ever be charged 3 months interest at any given time you choose to break your mortgage during the term. With a fixed rate it’s always the greater of Interest Rate Differential (IRD) or 3 months interest, and believe me those IRD penalties can be insanely large!
Statistics show that the majority of Canadians break their mortgage before the 5 year term is up, so save yourself some dough and consider going variable. There’s more to it than just the lower rate…and we here at Dominion Lending Centres can show you many mortgage options to fit your specific needs.
Thank you to my DLC colleague Danielle Spitters for this article.