Mortgage Rates - Fixed or Variable?
For many Canadians, one of the most important factors when applying for a mortgage is the mortgage rate. Mortgage rates have been in the headlines for many months now – news of record low interest rates one day and rising rates the next leaves many wondering how to decide between fixed or variable rates.
Understanding Your Rate
In a recent study, the Canadian Association of Accredited Mortgage Professionals (CAAMP) found that 82% of purchasers in 2013 opted for a fixed rate mortgage. More recent CAAMP statistics show that 67% are choosing fixed and more are leaning towards variable.
You may have a friend or neighbour who swears that fixed is the way to go because that was their choice. However, that doesn’t necessarily mean it is the best for you. The first step to assessing what is best is to understand the real difference between fixed and variable rates.
Fixed Rates
The fixed mortgage rates that lenders offer are closely tied to the Canadian bond market. The bond market fluctuates daily, and fixed mortgage rates can too. When you obtain a fixed rate mortgage the rate gets locked in for the term of the mortgage, regardless of the activity in the bond market. Many Canadian home buyers like the peace of mind that comes with the guaranteed stability.When you renew your mortgage after the term is up, you will be renewing at a rate indicative of the current state of the bond market.
Variable Rates
Variable rates are calculated using the lender’s prime rate, which in turn is determined by the Bank of Canada’s benchmark lending rate, also known as the “overnight” rate. Unlike with fixed rates, variable rates are not locked in and adjust as the benchmark rate fluctuates. In other words, when you choose a variable rate mortgage, you are receiving a rate that has the potential to rise or fall over the course of your mortgage term.
The benchmark rate has been holding steady at 1% since September, 2010 and is not expected to spike any time soon. This news is making variable rates more popular, as Canadians feel comfortable with the probability that their mortgage rate will stay at virtually the same level for the foreseeable future.
Learn More
Your mortgage is a significant commitment, and requires serious thought. Before making this important decision, consider consulting a professional Mortgage Broker. A Mortgage Broker will assess your personal financial situation and help you select a mortgage that best suits your needs.