When looking to get a mortgage, one of the first places to start is by asking what typeof mortgage you want: one with a fixed interest rate, or one where the interest rate is variable? Seventy-two per cent of mortgages obtained from 2013-2015 were fixed rate mortgages, for both first-time and repeat home buyers. Although it’s the most popular option by far, how do you know if it’s right for you? Here, some signs:
- You think interest rates are going to rise within the next few years
This is a tricky one because of course, no one knows with certainty what interest rates will do. Rates are super low at the moment, so If rates are already low, you don’t have much to lose by getting a fixed rate mortgage; if rates stay the same, you’re no worse off than you would be with a variable rate mortgage, and even if rates fall slightly, the difference probably won’t be that great. If they rise, however, you’re protected for the length of your term. Don’t forget, you can get a short-term fixed rate mortgage, meaning that you can set your mortgage rate for a year, for example, and then reassess when it comes time to renew.
- You’re a budgeter
The fixed in a fixed rate mortgage means both the principal of the loan as well as the interest amount, so the monthly payment is set in stone for the length of the term. If you’re a budgeter who needs – or wants – every dollar accounted for in your monthly household budget, a fixed mortgage payment is easy to stick onto your spreadsheet. It may be easier for you to set longer-term financial goals and save for specific items because you don’t have to keep a cushion available in case interest rates, and therefore your monthly payments, rise.
- You know that you aren’t going to need to break your mortgage
This one’s a biggie. A majority of Canadians homeowners with mortgages will end up breaking their mortgages before the end of its term, according to the Canadian Mortgage and Housing Corporation (CMHC) – and yes, refinancing is considered breaking your mortgage. Most people don’t plan on breaking their mortgage, but life can change quickly and fixed rate mortgages can have steep fees for breaking your mortgage. But if you’re absolutely certain that you won’t move or need to tap into your home’s equity for whatever reason, then a basic fixed-rate mortgage might be a no-brainer.
- You like predictability
Fixed rate mortgages tend to have higher interest rates than variable rate mortgages, but to some people, that doesn’t matter. People love to point out that variable rate mortgages tend to do better historically, but you have to take into account the climate and current market activity when you get your mortgage. If you’re one of these people who will sleep easy at night because you know how much you’re paying for the next 2, 3, or 5 years, then a fixed rate mortgage might offer you the best peace of mind. You can set it and forget it. Realistically, many people wouldn’t be able to afford a big rate increase that you might see happen of the length of a 5-year term, and so would rather be able to predict their payments, knowing that they have a set period of time in which they can plan for a bigger mortgage payment if the interest rate is higher at their time of renewal.
- You’re planning to move in the near future, but want to keep your current rate
If rates are low and you want to purchase a home but are a little hesitant because you’re planning on moving in the not-too-distant future, some fixed rate mortgages offer a feature called portability. With a portable mortgage, your mortgage moves with you to a new property, and if you have mortgage default insurance, then that moves as well. There are a few drawbacks to exercise this option, such as paying some bank fees in order to port the mortgage, but these fees are significantly less than those associated with breaking your current mortgage and/or getting a new one if the interest rates are higher at that time.
- You don’t get a thrill out of getting the best deal
Sure, low interest rates are important, but if the difference between a 2.6% interest rate and one that’s 2.9% doesn’t excite you, then a fixed rate mortgage might suit you best. You won’t get the lowest rate in the market with a fixed mortgage, nor will you benefit from any drops of the prime rate, but for some people, predictability and stability are most important overall than when it comes to their mortgage payments.
Contact your mortgage professional to review your options and ensure that they align with your financial goals. If you need a mortgage broker (we recommend that EVERYONE should use one, and we have a list here).
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