Mortgage Basics: Fixed vs Variable
The way a mortgage is structured merely relates to how much you have to pay each month and over how many months. There are fixed rate mortgages, which is also referred to as adjustable rate mortgages, and variable rate mortgages or VRMs. The difference between these two types of rates is right in their names. One does not change during the mortgage term while the other can.
A fixed rate mortgage is fairly straightforward. A financial institution quotes you an annual percentage rate and term, and you agree to pay a specific amount every month. That way, at the end of the term, you will have paid off the principal sum you borrowed, the interest you owe on it, as well as any associated expenses which will have been added all together. Fixed rate mortgages move in tandem with the government of Canada’s bond yields or the interest rate the government spends to obtain money through the sale of bonds.
Variable rate mortgages are a bit trickier because like fixed-rate mortgages, VRMs have a fixed term, but their interest rates change regularly. It can vary as often as every month, based on the movement of the prime or overnight rate. It is the government-set rate that serves as the primary catalyst for interest rates going up or down. Though many studies have shown that a floating interest rate can save you money in the long term, it is by no means guaranteed. Many people choose a fixed rate for that reason.
VRMs can be designed in two ways, either with fixed payments or fluctuating payments. If you choose to pay the same amount every month for the term of the mortgage, how much of your payment goes towards the principal and how much goes towards interest will vary depending on the interest rate that month. If you choose a VRM with a fluctuating payment, your monthly mortgage payment could vary wildly from month to month. The same amount will go towards the principal but how much you have to pay on interest will change, making your total payment unpredictable.
Which should you pick?
Those who prefer financial consistency will find themselves more comfortable with a fixed-rate mortgage, while those who don’t mind a little more uncertainty might find VRMs more appealing. Your choice will ultimately depend on your personal preference and what amount of risk you are comfortable with. The potential cost savings of a VRM but be tempting, but if the thought of your monthly payments fluctuating makes you nervous, it is not worth it.
Whether you are saving for your starter home or looking to add to your property portfolio, the team at Collin Bruce can help. We have access to competitive rates and the kind of friendly, personalized service the big banks don’t offer. Call us today to find out more about our mortgage products or to book an appointment.