The most common concern of people interested in mortgages is the two basic types of mortgage rates. Since many people have difficulty in deciding between a fixed and variable rate, here is an insight on the two types.

Fixed Mortgage Rates

A fixed mortgage rate remains the same for a certain period of time which is usually five or ten years.  The monthly payments are also the same for the entire term. Since you already know the value which you have to pay, planning a budget and saving money for it, becomes easy.

Variable Mortgage Rates

A variable mortgage rate changes with the prime rate, which is determined by the Bank of Canada. The prime rate fluctuates frequently, and the mortgage rate will change with it. So you will have to be prepared for effects this can have on your monthly payments because they will also vary over the entire term.

A variable mortgage rate is usually given as prime rate ± fixed amount. The prime rate will change over the entire time period, but this relationship will always be the same for the entire term.

Comparing Fixed and Variable Mortgage Rates

The monthly payments in a fixed rate remain the same throughout the term, which offers a certain level of stability. This also makes it easier to plan ahead, and accumulate sufficient funds in the long run to repay back the amount. If you plan your expenses well in advance, and cannot bear unexpected costs, then you should opt for a fixed rate.

A fixed rate may seem more feasible, but there is still a downside to it. You have to pay a premium, which is not the case with variable rates. Moreover,

A variable mortgage rate is good for you only if your monthly budget does not constantly worry you, and you can tolerate unpredicted expenses. The prime rate can change a lot, and so the monthly payments can fluctuate largely. If the prime rate experiences a significant increase, this can be a financial burden. But if the prime rate decreases, then this is to your advantage because you have to pay a lesser amount.

While variable rates may seem a more complex option, studies have shown that they are less costly.

Popular Trends

• 66% of mortgages are based on fixed rates, and a mere 30% are based on variable rates.
• 4% people avail a combination of the two rates.
• Younger people choose fixed mortgage rates whereas the older age group goes for variable rates.