There is so much to consider when you’re buying your home. Taking care of your mortgage concerns before you start house hunting will take a lot of pressure off your plate. Not only is it beneficial to know the kind of rate, and mortgage you’ll get before you start house hunting; confirming the terms and conditions in advance helps to eliminate some of the stress.
Mortgage Forces wants you to get more joy out of your house buying journey. We do that by working with you to answer your questions, squash your concerns, and ensuring you get the best rate. This article will help you decide between fixed or variable, and what’s best for you.
WHAT IS PRIME?
The prime lending rate is the annual interest rate our major financial institutions use to set rates for loans, including lines of credit and mortgages.
Every weeknight, the Bank of Canada (BoC) sets a target rate. This is the rate that banks can borrow money from the BoC. If the overnight rate becomes more expensive, the bank will need to raise its prime rate to cover costs. Thankfully, the BoC also lowers their rates occasionally, which causes banks to lower the percentage they lend at.
These rates really do fluctuate, which is why we have the option for fixed or variable mortgages. To give you an idea of how they fluctuate:
In 1980, prime averaged 21%
In 1985, prime averaged 10%
In 1990, prime averaged 14%
In 1995, prime averaged 8%
In 2000, prime averaged 7%
In 2005, prime averaged 2.5%
In 2010, prime averaged 2.3%
In 2015, prime averaged 3%
Now in 2021, prime has been about 2.4%
WHAT IS A FIXED RATE MORTGAGE?
A fixed rate is pretty simple, and often recommended for those entering into their first mortgage. If a lender offers you a rate such as 2.4% on your $500,000 mortgage, you’ll continue paying 2.4% for your entire term (often five years). That rate stays the same, no matter how much interest rates fluctuate.
The downside comes when interest rates take a hit. If mortgage rates suddenly start averaging 1.8%, you’re paying extra money. However, if they go up to 3%, you’ll continue paying 2.4%, saving you money. With the above interest rates in mind; if you signed a five-year closed mortgage in 1980, you would have continued paying 21% while the rate was dropping in half. However, if you signed a five-year closed mortgage in 1985, you would have saved money as the rates slowly increased again.
A report from Mortgage Professionals Canada (MPC), an organization that represents mortgage brokers, lenders, and insurers; shows us that approximately 70% of homebuyers in Canada choose a fixed rate mortgage. The simplicity it offers means the amount coming out of your bank account is the same for each payment.
WHAT IS A VARIABLE RATE MORTGAGE?
In short, a variable rate is the opposite of a fixed rate. Your payments will fluctuate as Canada’s Prime Rate goes up and down. That means if you signed your five-year mortgage in 1980, and the rate started dropping, your payments would also continue dropping.
A POSSIBLE 3RD OPTION
A hybrid mortgage allows you the best of both worlds. Your rate will remain variable, but the amount paid is fixed. This means if you sign a five-year mortgage while the rate is 2.4%, your payments, for example, might be $1,500 a month. If prime goes up, you continue paying $1,500 a month, but less money pays down your principal and more goes to your interest. If prime drops, you’ll continue paying $1,500, but more money is applied to your principal, paying down your mortgage faster.
WHAT’S RIGHT FOR YOU?
There’s a few “ifs” to take into consideration:
If you don’t think you can commit to closely watching interest rates, you might find it easier, or safer to choose a fixed mortgage rate.
If you’re offered an amazing rate (1.8%, for example) then you’ll want to choose a closed rate, so you’re guaranteed to continue paying that.
If you feel rates are high right now, and think they’ll be dropping soon, then choose a variable rate. If/when the rate does drop, you can choose to “lock it in” with a fixed rate then.