Vancouver Metro, September 13, 2012
By Ylva Van Buuren
Differences. Your decision will be based on cash flow, financial personality, and long-term goals.
Which type of mortgage should you go with: A fixed or variable rate mortgage?
With a fixed mortgage, explains the Financial Consumer Agency of Canada, the interest rate you pay to borrow the money (and the mortgage payments you pay regularly) are set for the entire term. On the other hand, a variable mortgage has an interest rate that fluctuates with prime and can change during the term.
A fixed rate mortgage traditionally has a higher interest rate, says David Smith, a mortgage broker and partner at Oriana Financial, Toronto. However, interest rates are so low right now that the spread between the variable and the fixed is not very great.
But there are other differences that can help you decide:
Your Need to Know
Do you want to know exactly what you owe on your house at the end of the term? A fixed mortgage shows you the interest and principal payments from start to finish.
Keep in mind that most financial institutions offer a fixed rate variable mortgage, too – which means you have a variable interest rate but your payments do not change for the term. What does change, explains Brenda Hiscock, a member of Advocis, the Financial Advisors Association of Canada and a certified financial planner with Guilfoyle Financial Planning Inc., is how much of each payment is interest and how much is used to pay down the principal – as the interest fluctuates with prime. “The mystery lies in what the balance will be at the end of the term.”
Your Financial Personality
A fixed rate mortgage is predictable and safe from any interest rate uncertainty while a variable rate mortgage requires a certain ongoing vigilance, says Smith. “Will the prime go up? Should you lock in or not?” You have to be prepared to stay on top of interest rates with a variable rate mortgage.
A variable mortgage can make sense for people who have good cash flow. You can lock in at any time for three years or more, says Hiscock, and you have the cash flow to accommodate future increases and payments if that is the case.
How committed to the property you are can determine whether you want to lock into a long-term fixed rate or not. With interest rates at record lows, it is likely they will go up in the future. These days, says Smith, we can do a 10-year fixed mortgage for less than four percent … locking in for that period might be an option for you.By Shaz Karim, Thursday, October 4th, 2012