When it comes to mortgages, there are plenty of options to consider. In the big picture, that’s a good thing. Why? Because different people have different wants and needs for their home loans.
Consider open mortgages vs closed mortgages. Open mortgages give you more flexibility in how and when you pay down your loan, as compared to closed mortgages. On the other hand, closed mortgages can give you a better interest rate that leads to more money saved over time.
Based on your preferences and circumstances, either of these mortgage options might be better for you personally.
Looking for predictability and a lower rate? A closed mortgage may be your best bet. Know you can pay down your mortgage early and aggressively? An open mortgage might be what you’re looking for.
The same is true when it comes to fixed vs variable-rate mortgages. Each option has its upsides and potential downsides. Deciding which is better for you starts with understanding both options. Then, you can think about how they might fit into your finances and plans.
Let’s take a closer look at variable vs fixed-rate mortgages.
Fixed-Rate vs Variable-Rate Mortgages: Basic Definitions, Pros and Cons, and More
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage gives you a fixed interest rate. In contrast, a variable-rate mortgage will change based on the prime interest rate in Canada.
As Forbes explains, individual financial institutions set their own prime interest rates. However, they generally follow guidance from the Bank of Canada.
With a fixed-rate mortgage, your interest rate is fully locked in for the term of the loan. It won’t increase or decrease based on changes in the national or global economy. That makes your monthly mortgage payment much more predictable. You can count on your payments going toward paying back a specific amount of principal and interest. The interest rate on your loan won’t change. All you have to focus on is making your regular payments and making sure they fit into your monthly budget.
In recent years, interest rates have risen several times. That can make locking in an interest rate seem like a clear benefit. However, if interest rates drop and stay low, a fixed-rate mortgage could be more expensive than a variable-rate loan.
Fixed-Rate Mortgages: Pros and Cons
Advantages of a fixed-rate mortgage:
- Predictability. Your interest rate is locked in and won’t change based on the prime interest rate or other factors.
- Safety. Once you’re approved for your mortgage, you can confidently build your monthly budget around it.
- Potential owner costs. When interest rates rise and stay high, your fixed-rate loan remains the same.
Disadvantages of a fixed-rate mortgage:
- Higher interest rates. The security of locking in an interest rate also means you likely won’t get the absolute lowest available to you.
- Potential higher costs. If interest rates go down and stay down, you’ll likely pay more than you would with a variable mortgage.
What is a Variable-Rate Mortgage?
The difference in variable vs fixed mortgage rates is what distinguishes these two home loan options. A variable-rate mortgage is not locked in for the term of the mortgage. Instead, it changes based on the prime interest rate.
This might mean paying more or less compared to a fixed-rate mortgage. With consistently low interest rates, you can save money. If interest rates keep rising, you’ll have to pay more than you would with the alternative. It’s crucial to track rate changes and look at how they might affect your payments.
All other things being equal, the additional risk of a variable-rate mortgage means you can access a lower interest rate. In simple terms, people who choose a fixed-rate mortgage pay a premium to lock in their rate and avoid risk.
Variable-Rate Mortgages: Pros and Cons
Advantages of a variable-rate mortgage:
- Lower rates. By taking on additional risk, you can access a lower interest rate at the beginning of your loan.
- Opportunities for savings. If interest rates stay low, you can end up paying less overall as compared to a fixed-rate loan.
- Reduced penalties. Want to break your mortgage? It’s usually less costly with a variable-rate mortgage.
Disadvantages of a fixed-rate mortgage:
- No certainty. You can try to watch and forecast economic changes. However, you won’t know your interest rate for the future ahead of time.
- Potentially higher costs. If interest rates increase and stay high, you could end up with a more expensive mortgage.
Get the mortgage that works for you!