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Purchasing a new home is a pivotal moment in your life, and requires you to choose which type of mortgage is the right one for your life. Here is some information on both to assist you in determining whether a fixed mortgage or a variable mortgage is best for you.

Variable Mortgage

A variable rate mortgage is often calculated based on the prime and fluctuates with the interest rates. According to Which Mortgage Canada, it involves initial lower interest rates, but is more risky than the fixed rate mortgage. The following is a comparison of the pros and cons of choosing a variable mortgage.

The Pros of a Variable Mortgage

1. The initial interest rate is low: Many people choose the variable rate mortgage for this reason. The lower interest rates allow for larger payments to go towards the principal amount, speeding up the process of paying off a mortgage.
2. Some are convertible: When a bank is willing to convert a variable mortgage, it is beneficial in the event that it no longer suits your lifestyle. This ensures that if interest rates get too high, you can switch over to a fixed rate mortgage.
3. They are historically the more popular type: According to monstermortgage.ca, a study from York University found that between the years of 1950-2000, the variable rate mortgage was the more common selection for Canadians.

The Cons of a Variable Mortgage

1. Your payments fluctuate: In a variable mortgage, you are responsible for paying the difference when the interest rates rise, making it the risky choice.
2. It is unpredictable: Interest rates change, depending on the Bank of Canada. There is no way to know when an interest rate is going to suddenly rise.
3. A minimum payment may not be enough: According to whichmortgage.ca, many mortgage brokers suggest that if you choose a variable mortgage, it is imperative that you are prepared to pay at least 2% more than the minimum required payment each month.

Fixed Rate Mortgages

Security and stability are the main factors that influence Canadians to opt for a fixed rate mortgage. According to Mortgage Broker News, a CIBC survey conducted in 2015 found that a fixed rate mortgage is the more popular choice among Canadians. The following is a comparison of the pros and cons of a fixed mortgage.

The Pros of a Fixed Mortgage

1. Guaranteed financial security: In a fixed rate mortgage, regardless of the term, the interest rates are set and guaranteed to not fluctuate for the course of the term, ensuring financial stability.
2. Straightforward and easy to understand: A fixed rate is very easy to understand, and there are very few variations between lenders.
3. There are three terms to choose from: A fixed rate mortgage allows the homeowner to choose whether they would like to pay for a 15, 20, or 30 year term. The longer the term, the lower the monthly payments will be.

The Cons of a Fixed Mortgage

1. Qualifying for a loan is difficult: When the interest rates are high, banks and mortgage brokers expect you to have enough to pay larger amounts. If you cannot prove that you are financially stable enough to cover the high rates, you will not qualify for a loan.
2. Longer terms mean more money: If you select a 30 year term, you will have the lowest monthly payments, but you will end up paying an overall higher cost, because the extra decade is focused primarily on paying interest on top of the principal amount.
3. You cannot benefit from a drop in rates: With a flexible rate mortgage, if the interest rates drop, more money from your payments goes towards the principal amount. With a fixed rate mortgage, you will not be able to benefit in any way from a drop in rates.

There are many pros and cons to both types of mortgages. Regardless of which one you choose, it should be the one that best suits your lifestyle and financial situation. This will ensure that you can enjoy your new home, without worrying about your mortgage payments. For more information on mortgages, visit the Falconcrest Homes’ Blog.