Fixed or Variable-Rate? The Decision of the Times

Finding a mortgage can be quite the battle these days, but the even bigger battle in many minds of prospective homeowners, is whether to go with a Fixed Mortgage or Variable Mortgage.  For some, this isn't an option as the lenders don't offer Fixed Mortgages, but for those that do, it should be a careful decision.

So what's the Big Deal?
The big difference between a Fixed Mortgage and a Variable Mortgage is how the mortgage interest rate is calculated over the term of the loan. As you may have guessed, in a Fixed Mortgage, the interest rate on your loan stays the same, throughout the term of your loan.

Variable Mortgages however have a fluctuating interest rate that varies based on one of more indices. To make matters even more confusing, different Variable Mortgage options have different periods of "rate freezes". This may be an advantage or disadvantage depending on market conditions.

It's a Game of Risk
The primary difference between the types of mortgages is who holds the risk in the event that the mortgage rates change. For banks, their cost of borrowing money can vary on an hourly basis, so they want to make sure that the rates they charge you allow them to still make a profit.

In Fixed Mortgages, a bank will assume all the risk for interest rate fluctuations. This may mean that at the end of the loan, the bank could lose.

In a Variable Mortgage rate situation, the homeowner assumes some of the risk. We say some, because Variable Mortgages have safeguards in place that partially protects the consumer from the daily fluctuations and limits your potential impact. Many Variable Mortgages, for example, have a maximum increase of say 1% per year.

So no matter what, the bank still has the risk that they could lose out. It's whether or not you share some of the risk, to reap some of the benefits, such as a term of lower interest which may put you ahead on your mortgage.

So Which One is Right for Me?
It's hard to determine this with a simple answer. If you are confident that your income will continue to increase, it may be a good idea to look at a Variable Mortgage rate loan. This way, if the rates go up, you can handle it. If the rates go down, you won't be trying to lower your payment to make ends meet. When rates go down and you maintain the same payment, you begin knocking off your principal balance fast. A Variable Rate mortgage is also good for those who plan to pay off a home early or sell it in a short period of time.

A Fixed Rate mortgage is more appropriate for those who are in unstable jobs, or want to maintain a steady payment. It may also be appropriate for those who expect to run the full-term of the mortgage. However, a tip to remember with Fixed Rates is that refinancing is an option about every 5 years, which may also reduce your mortgage payments and term over time.

Read the Fine Print
As with any contract or legal situation, you should always take care of the fine print. The fine print may reveal which mortgage may be of more interest to you depending on your financial situation. Remember to consult the advice of a licensed Mortgage Broker in your area for the best possible results.

By: Favian Clai