If you are planning on buying a home, knowing what type of mortgage to get is very important. There are a number of terms you can select depending on your financial needs and how long you want to finance. As well, you will need to decide whether to choose a variable or fixed mortgage rate. The Canadian housing market has seen rates plummet in the last couple of years and even more so in the last couple of months. It is by all means an ideal time to buy, but being aware of the advantages and disadvantages of each loan type will help you make the right decision.
Fixed rate loans have been the most popular traditionally, due to the fact that they offer buyers the peace of mind of a stable payment. The rate is essentially locked in at closing and is guaranteed to never go up. Given that housing costs account for a large portion of most people’s monthly expenses, knowing what you’re going to pay each month certainly has its benefits. On the other hand, if the market ever sees a further decrease in mortgage rates (it may be hard to believe at this point), you will not be able to take advantage of the trend. For better or for worse, your rate will remain the same for the duration of the loan. With this in mind, here are some of the benefits and drawbacks of both fixed and variable mortgage rates.
Fixed or variable: which mortgage type is right for you?
- With a fixed rate mortgage, you get stability and consistency. No matter what happens in the market, your loan payment will always be the same. With the interest rates in Canada being as low as they are currently are, buyers truly are getting the best of both worlds.
- If interest rates continue to go down, the only way you will be able to get access to them is by refinancing. If you ever decide to do this, be prepared to pay closing costs again.
- The interest rates on fixed mortgages tend to be higher than their variable counterparts. Depending on how much you are financing and for how long, the amount you could save could vary considerably.
- Variable rate mortgages fluctuate as the prime rate does. This may seem off-putting, but it has been found that historically these loans typically end up costing buyers less.
- If rates are predicted to go down and stay down for an extended period of time, a variable rate mortgage could be the better option. This allows you to secure a low rate initially and benefit from lower payments going forward.
- Unfortunately, these types of mortgages do not offer the same security as fixed ones do, which is why a careful analysis of your budget and the market are recommended before financing a variable rate.