Posted onMarch 02/2020
Many first-time homebuyers will need to determine if going with a fixed variable mortgage is preferable over a variable rate mortgage. Given the fact that many houses in North America cost upwards of $1 million in many of the world’s most popular cities, it makes sense to take the time to weigh the pros and cons of fixed variable mortgages and variable rate mortgages. Here, we will discuss the two mortgage types, as well as the main differences between them.
Main Difference Between Fixed Variable Mortgages and Variable Rate Mortgages
If you were to opt for a fixed-rate mortgage, then the payment and the mortgage rate would remain the same month after month for the duration of your mortgage term. However, with a variable rate mortgage, the mortgage rate will fluctuate according to the prime lending rate, which is set by the establishment that issued the loan.
For instance, a variable rate may be quoted as prime, plus or minus a given amount (e.g., prime +0.35%). Furthermore, while the prime lending rate may change, the actual relationship to the prime will not change over the term of the loan.
Pros and Cons of Fixed-Rate Mortgages
The biggest advantage of a fixed-rate mortgage is that the rate will be set from the beginning, and will not change, regardless of whether or not rates fall or rise over time. As such, you may enjoy peace of mind and stability and may be able to budget easier as a result.
However, if the difference between the fixed and variable rate is notable, then the premium that you would have to pay to enjoy said stability and protection via the fixed-rate mortgage may not be worth it in the long term.
Pros and Cons of Variable Rate Mortgages
Historically speaking, variable-rate mortgages are less costly to the homeowner over time. However, a variable rate mortgage may be quite anxiety-inducing to some people, especially if they work in a field that is notorious for poor job stability.
In addition, if your prime rate were to increase over time, then the amount of interest you would need to pay on your home would also go up, which will increase your financial burden.
Which mortgage type is more popular?
Currently, about 2 out of 3 homeowners in North America, or 66%, opt for a fixed-rate mortgage due to its financial security and stability. Interestingly, 29% of homeowners in North America will opt for a variable rate mortgage, with people in older age demographics being more likely to choose a variable rate mortgage. In contrast, younger age groups are more likely to choose a fixed-rate mortgage.
In addition, 4% of first-time homebuyers will opt for a combination of the two, which is aptly known as a combination mortgage.
If you would like to learn more about the differences between fixed-rate mortgages and variable rate mortgages, then please visit our website or give us a call at 888-257-8130.