Deciding what kind of mortgage to get is often complicated, especially if you’re a first-time buyer. Even experienced buyers take their time to the fixed-rate mortgage and the variable rate mortgage because there are so many influencing factors. Things like the current economic circumstances, your employment situation, amount you want to borrow, and your credit rating will all influence your decision on your mortgage.

There are two main types of mortgages. Fixed-rate and variable rate mortgage. In this article, we are going to look at the variable rate mortgage so that you can learn more about this product, what it is, and if it is right for you.

The definition of a variable rate mortgage can be found in its name – the word variable. Variable rate means that the interest charged on the amount borrowed can vary. How does it vary? Well, the rate is tied to interest rate decisions made by the Bank of Canada. When the Bank of Canada increases interest rates, the interest rate on your variable rate mortgage will increase. When interest rates decrease, the interest on your variable rate mortgage will decrease.

Is a variable rate mortgage for me?

The answer to this question depends on how comfortable you are with fluctuations in your monthly budget. If interest rates increase, do you have the funds or income to pay a higher monthly mortgage fee on an ongoing basis? If the answer to this is ‘yes’, then you could probably select a variable rate mortgage. If you say ‘no’ because you feel uncomfortable with changes to your budget, or that you couldn’t afford a mortgage payment increase, then a fixed rate mortgage is the best choice for you. Unlike a variable rate mortgage, a fixed rate product means you won’t be unpleasantly surprised by sudden increases in your monthly mortgage fee. This is because with a fixed rate mortgage the interest rate is set and fixed at the time you take out the product. It will not increase or decrease regardless of what happens to the Bank of Canada prime rate.

What is a fixed rate mortgage?

A fixed rate mortgageis a product where the interest rate remains the same throughout the lifetime of the mortgage, regardless of what happens to the Bank of Canada prime interest rate. Individuals who like financial certainty, or who are keen on knowing what their budget is every month will find this kind of mortgage appealing.

Historically, a variable rate mortgage has been lower than a fixed rate mortgage over time. Of course, whether a fixed rate mortgage is lower at any given time will depend on economic circumstances, such as stability, inflation, and overall health of the economy. Sometimes banks and economic forecasters will publish longer-term economic trends which include information about interest rates. While it’s comforting to think that these trends offer an iron-clad guarantee, it’s important to remember that no one can predict the future. Unexpected global events can affect Canada’s interest rates, too.
For more information about variable rate mortgages, call Northwood Mortgages at 888-495-4825 or contact us here.