Two of the most popular mortgages in Canada are fixed rate mortgages and variable mortgages. Choosing between these two types of loans depends greatly on your individual financial goals. But the good news is that either can work to suit your needs.
In Canada, the most popular mortgage term selected is the five-year fixed rate mortgage. Fixed-rate mortgages can often be had in a number of different term lengths. Those terms can range from six months all the way up to twenty-five years.
One thing to keep in mind is that the longer the term is, the higher the interest rates will likely be.
Benefits of Fixed Rate Mortgages
Historically speaking, most Canadian financial experts agree that a variable rate mortgage will result in lower interest payments over time. One thing that a variable rate mortgage can’t offer, however, is stability when it comes to finances and budgeting.
No Worrying About Fluctuating Prime Rates
One of the biggest perks of going with a fixed rate mortgage is that it allows you to plan diligently. The payments are the same each month, allowing you to budget precisely. No guessing what they may look like a month from now or a year from now.
Another major benefit is protection against rising interest rates. With fixed rate mortgages, the interest rate stays the same for the life of the mortgage. When the prime rate spikes, fixed term mortgages remain unaffected.
Take, for instance, a five-year fixed rate mortgage locked in at 3.75%. Even if the prime rate climbs up to 10.5%, your interest payments will not change. That can be hugely beneficial if the market becomes particularly volatile.
Generally speaking, Canadians are leaning towards fixed rate mortgages because of the security that it grants them. Having that security, especially with something like a mortgage payment, can help to take the guesswork and worry out of those payments.
Another great feature of fixed rate mortgages is that you can make extra payments in order to pay off the principal earlier. The math is simple: the less time you spend paying the loan, the less interest you will have to pay.
Generally speaking, most fixed rate loans won’t have pre-payment penalties. Other mortgage types can carry those, discouraging the borrower from trying to pay the principal of the loan off sooner. Not having to face those pre-payment penalties can be beneficial for those with extra income that want to put it towards paying off the principal of the loan.
Downsides of a Fixed Rate Mortgage
And just like every other mortgage around, there are negatives to be had when going with a fixed rate mortgage. Very few options are overwhelmingly positive or negative, so it takes thought and consideration to decide if the benefits and disadvantages of a specific mortgage fit your plans.
Because you are locking in your rate for the duration of the term and protecting yourself from rising rates, you won’t get the lowest possible rate. There is a cost for that protection and having slightly higher rates is it. The only way this becomes not true is if interest rates rise.
Depending on the length of your term, there is a distinct advantage to taking the fixed rate. Saving the stress of not having to watch the prime interest rates is one. Knowing what your payment is and knowing it won’t rise is another.
Paying Off Principal Slower
Another disadvantage of fixed rate mortgages is that the first several years go towards paying off the interest. When this happens, that means that the principal takes some time to get into paying off the principal.
If you plan to sell your house within the first five to ten years of purchasing it, a fixed rate mortgage may not be the best option to choose.
If you thought that was all of it, think again. There are hybrid mortgages that combine some of the aspects of fixed rate mortgages and variable rate mortgages. For instance, the first five years of your term could be fixed while the last five could be variable.
Ultimately, it depends on how you feel about the trends of interest rates. If you think that they will go down over the length of your mortgage, going with a fixed rate mortgage may not be the best idea. But going with that fixed rate means getting reliability and stability in payments and finances.
How Do I get a Fixed Rate Mortgage?
If you are interested in a fixed rate mortgage or just want to know more about it, a call to Super Brokers should be your first move. Our expert team of professionals will work diligently to provide the information that you need to make the best decision possible.
Don’t go through the mortgage process alone. Super Brokers is here to make the process easier and smoother than ever before.