Fixed rate vs variable rate, which is better? In general, new home buyers and clients looking to refinance their home face this tough decision. Moreover, choosing a fixed rate or variable rate mortgage can have a profound impact on your finances. This is why it is critical to work with an experienced mortgage broker. A mortgage broker can help you assess your decision based on your current finances and long term goals. This allows clients to make the right decision in deciding on a fixed rate or variable rate mortgage.
Indeed, both come with a standard fixed payment that will remain the same over the term of the mortgage. In contrast, the amount being applied to the principal can vary dramatically between the two types of mortgages. For example, with a fixed rate mortgage the amount being applied to both principal and interest payments never changes. Conversely, If you choose a variable rate mortgage, the amount being applied to the principal can either go up or down depending on the changes on the bank’s prime rate.
Rates on fixed rate mortgages never change and could look something like this:
5.00% on a 5 year term amortized over 25 years
In this scenario, the rate of 5% remains the same over the term of 5 years and the amount going to both principal and interest will not change
Rates on variable rate mortgages do change and could look something like this:
Prime – 0.50% on a 5 year term amortized over 25 years
In this scenario, the prime rate, assigned by the bank is reduced by -0.50% for the term of the mortgage. Big banks set their prime rate based off of the Bank of Canada prime rate. Having said that, the prime rate will fluctuate so if prime was 3.5% then the rate being paid on the mortgage would be 3% but if prime went up to 4% then the effective rate would be 3.5%