Fully understanding the differences between the various types of mortgages available to you can be a daunting challenge. The two main types of mortgages you should be aware of are fixed and variable rate mortgages. In this blog, we will explain the differences between these two types of mortgages and review mortgage rates in general.
The primary difference between a fixed rate and variable rate mortgage is the changeability of the interest rate. The interest rate in a fixed rate mortgage does not change during the term of the mortgage, whereas the interest rate in a variable rate mortgage is subject to change based on fluctuating market interest rates.
Fixed Rate Mortgage
As the name suggests, a fixed rate mortgage means the interest rate that you agree to is fixed or locked in for the term of your mortgage. This also means that even when bank interest rates fluctuate due to changes in the economic markets, your mortgage interest rate will not change. The rate is guaranteed for the term.
Benefits of a Fixed Rate Mortgage
Fixed rate mortgages are popular because they offer stability and security in a changing economy. With a fixed rate mortgage, you always know what your mortgage payment will be, allowing you to budget effectively to pay down the mortgage and avoid unwelcome surprises.
Variable Rate Mortgage
In contrast to fixed rate mortgages, the interest rate in a variable rate mortgage can be subject to change. The mortgage interest rate is not guaranteed for the term and can fluctuate based on market conditions.
A variable rate mortgage is attached to the Prime interest rate, which is determined by the Bank of Canada. The Bank of Canada is not a commercial bank and has no vested economic interests other than serving to promote the economic and financial well-being of the country.
Benefits of a Variable Rate Mortgage
A variable rate mortgage offers greater flexibility than a fixed rate mortgage. Variable rate mortgages are ideal for people with flexible budgets, and allow you to pay down your mortgage principal faster when interest rates are low.
Which Mortgage is Right for You?
Both fixed rate and variable rate mortgages have their pros and cons. While a fixed rate mortgage offers security by ensuring that your monthly mortgage payments don’t change, a variable rate can help you take advantage of low interest rates when they arise.
The type of mortgage that is best for you depends on your needs and goals. For example, if you are looking to pay down your mortgage principal in a short amount of time and if interest rates are trending on the low side and declining, then a variable rate mortgage may be advantageous.
However, if interest rates are going up, you may benefit from locking in the current interest rate that you are offered. Also, if you have a limited income or a fixed budget, a fixed rate mortgage offers you the stability of knowing how much is going toward your principal each month. On the other hand, variable rate mortgages offer greater flexibility than fixed rate mortgages.
Connect With Us to Learn More
Speaking with a mortgage specialist about your particular financial situation can help you decide which type of mortgage is best for you.
Contact Axiom Mortgage Solutions for professional advice from our experienced mortgage experts. Call us at 519‑735‑1440 (Tecumseh location) or 519‑326‑4978 (Leamington location), or send us a message on our contact page.