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How To Decide Between a Fixed vs Variable Rate Mortgage

How To Decide Between a Fixed vs Variable Rate Mortgage

One of the first decisions you make when getting a mortgage is whether to go with a fixed or variable rate mortgage. It's undoubtedly one of the most crucial choices you'll make, as it will impact your monthly payments and the entire cost of your mortgage over time.


Although the choice between fixed and variable rate mortgages may appear straightforward, numerous aspects can influence your decision. Fixed-rate mortgages have traditionally been more popular, although variable rate mortgages have proved to be bigger money-savers for homeowners in most cases.


This article looks at fixed and variable rate mortgages and the factors affecting them that can help you make your decision. 


What is fixed and variable rate mortgage?


The rate of interest on a fixed-rate mortgage remains constant over the life of the loan. The term or length of a mortgage contract might last anywhere from a few months to ten years.


There are usually higher interest rates on fixed-rate mortgages than on variable rate mortgages.


A variable rate mortgage varies based on your financial institution's prime rate. The prime rate is mostly determined by the Bank of Canada's key interest rate. 


Factors that you need to consider when choosing between fixed and variable mortgage


1 - The level of risk you can take.


A fixed-rate mortgage is likely better for you if you're naturally conservative and don't enjoy taking chances because your interest rate will remain constant during the term.  


Further, you'll know precisely how long it will take to pay off your mortgage.

2 - Rates of interest


If your belief is that interest rates will rise, a fixed-rate mortgage is a good option to lock in your rates. If you believe interest rates will fall, a variable rate mortgage might save you a lot of money.


3 - You could sell your home before the end of the term.


Breaking your mortgage for any reason could attract a penalty. Fixed-rate mortgages compute the charge by factoring in the amount of interest you'll pay over the life of the loan, which can be rather high.


To get out of a variable rate mortgage, you often only have to pay three months' interest.

4 - Spread


The spread is the difference between the lowest rates of fixed and variable rate mortgages. Many consumers prefer a variable rate when the spread is wide. A fixed-rate may be worth locking in if the spread is low.


Final thoughts


A fixed-rate mortgage will give you the peace of mind of knowing that your mortgage rates will remain the same for the duration of your loan. A variable rate mortgage may be more enticing if you're ready to gamble on interest rates staying the same or decreasing. Mortgage Capital Investment can help you find the best mortgage at the most affordable rates, according to your needs.

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