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The Difference Between Fixed and Variable Rate Mortgages

I’ve been working as a mortgage broker in Oakville for many years.  One of the questions that new home buyers ask a lot is what the difference is between a fixed rate and a variable rate mortgage.  Simply put, a fixed rate means that your rate won’t change and an adjustable-rate means the interest rate can rise and fall with the economy.

Now, this can be a bit tricky, because a lot of adjustable-rate mortgages often offer you a much lower interest rate than what you would get with a fixed-rate mortgage package..  This is an introductory rate that will remain the same for a set period between a few months to a few years.  Once the introductory period has ended, your interest rate changes and, more than likely, your payments will go up.

Fixed-rate mortgages tend to give a bit more stability because you know your monthly payments won’t change.  So why do some people go for the ever changeable adjustable-rate mortgages?

The risk versus the reward of adjustable-rate mortgages

With variable and adjustable-rate mortgages you tend to get a lower interest rate than the fixed-rate products.  But the drawback here is the risk it entails when that rate could suddenly shoot up.  So how do you know if an adjustable-rate mortgage is for you or not?  Well, if you can afford an increase in interest rates then you could benefit from it.  If you can handle a 2% increase in rates, then you could be fine.

An adjustable-rate mortgage can work if you have that introductory period of a few years and you are planning to move before that period ends.  This means you get a much lower rate without the worry of an interest rate increase.

When the interest rates go down, more of your payments are going to the principal of the mortgage.  The more they go up, the less that is being paid towards the principal.  This has an impact on the amortization period of your mortgage.

Open variable rate mortgages

You could always go for the open variable rate mortgage, which will let you put down as much as you want, or even pay off the mortgage in its entirety whenever you want.   You can also change your term time with no penalties or charges.   With this option, your payments are usually fixed for the entirety of the term and it’s an ideal choice for those who have a cash-flow that changes are considering selling their home, or who want to make more than a 20% down payment on their mortgage amount.

Closed variable-rate mortgages

With this option, your payments tend to be fixed for the term but the prepayment options can be a bit limited.  You will also need to know whether you’ll be able to make lump-sum payments, for how much, and how often.

Fixed-Rate Mortgages

Fixed-rate mortgages are for those who want more control over their budget.  You have the options of an open, closed, or convertible fixed-rate mortgage.
Open fixed-rate mortgage

This option allows you to prepay in part or full whenever you want without being penalized.  You also have the ability to change to a different term when you want.  It’s a good option for anyone who wants a lot of flexibility.

Closed fixed-rate mortgage

With this option, payments and rates are fixed for the chosen term, which is perfect for those budget-minded people, and those wanting a lower rate than an open mortgage gives.

Convertible fixed-rate mortgage

This option allows you to switch to closed term mortgage for a year or so with no penalties.  It’s a good option if you are looking to keep your options open, but prepayment privileges will be less flexible.

If you’re looking for a good mortgage package and aren’t sure whether to go with a fixed or variable/adjustable-rate mortgage, give our mortgage broker team in Oakville a call today!

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