Variable-rate vs fixed-rate mortgages is the battle that rages on. Both have their pros and cons. Here’s a quick summary of the differences between the two:
|Variable Rate Mortgage
|Defining each type
|A type of mortgage is where the interest rate varies month-to-month based on market conditions.
|This type of mortgage is where the interest rate stays ‘locked in’ for longer periods of time.
|What’s the payoff?
|Your rates are usually lower, so you normally pay less interest, but there’s no guarantee.
|Security in knowing that your rates and payment amounts will not change until renewal time.
|The risks associated
|There is no insulated from spikes in mortgage rates. If rates shoot up, you could be paying more interest.
|Fixed rates are set higher than variable rates because they compensate for prospective rate spikes. In addition, if rates drop, you can’t take advantage of the savings without refinancing.
|Can you switch mid-term?
|If you have an open variable rate mortgage, yes, you can switch. If your mortgage is closed, then not without paying penalties. Most variable-rate mortgage products are closed, but most allow you to lock-in to a fixed rate mid-term.
|Like variable-rate mortgages, this depends on whether the mortgage term is open or closed. Open term fixed-rate mortgages are far less common than those with closed terms.
|Which is best?
|York University found that over the last half-century, nine times out of ten, Canadians paid less interest using variable rates.
|Should rates be expected to rise, it can be beneficial to lock into a fixed rate before the banks actually raise their rates.
|Current variable rate: 6.30%
|Current 5 year fixed rate: 5.09%
Variable Rate vs Fixed Rate: which is better?
When it comes to variable rate vs fixed-rate mortgages, both have have their advantages. When it comes to the opinions of brokers, lower interest tends to take favour over the long-run. This has a lot to do with the interest rates.
In the last 50 years, variable mortgage rates have been lower on average than fixed mortgage rates. But as the financial adage contends: past performance is no indication of future results. The answer to which is better isn’t as simple as looking at which mortgage rate is lower now, or which mortgage rate has been lower, historically.
In the end, determining whether a fixed or variable rate mortgage is better is an exercise in speculation, experience, and consideration of tolerance for risk. This is why it’s often important to involve an experienced broker or your financial planner.
Hybrid Mortgages: The Halfway Point
If variable rate vs fixed rate isn’t for you, a newer form of mortgage has been gaining traction in the last decade. This type is known to the industry as hybrid mortgages. Hybrid mortgages meld many aspects of both traditional fixed-rate mortgages and variable rate mortgages.
Hybrid mortgages work by associating part of the loan amount with a fixed rate, and the rest with a variable rate. This gives hybrid mortgages a sort of variable/fixed duality that, in theory, gives you the advantages of both, and provides some flexibility in terms of how much risk you’re willing to assume.
Much like variable-rate mortgages, hybrid mortgages allow you to take advantage of decreasing prime rates. When the prime rate drops, the portion of the mortgage using the variable rate will begin to accrue interest at a lower rate, which is great. When and if the prime rate increases, the portion of the fixed portion of the mortgage will help to anchor the hybrid mortgage. This means that your mortgage payment doesn’t skyrocket.
If you would like to apply for a hybrid mortgage, Super Brokers has unique expertise in this area. Give us a call today for more!