Variable vs Fixed Interest Rates
Trying to save money? Looking for stability? Which one should you choose?
Variable rates go up and down depending on the prime rate. The prime rate is decided by the Bank of Canada. Historically, people chose variable rates because they're cheaper than fixed interest rates. Yet, the prime rate can easily fluctuate up or down, meaning that your monthly payments can be affected overnight.
The safe choice. The interest rate that is offered will be your interest rate till the end of the term. You'll have the same monthly payments whether your current mortgage rate goes up or down. A fixed interest rate is becoming more demanding in 2019 as many are unsure of the situation, and would like peace of mind that their rate will not be affected till the end of their term
Common questions to ask yourself...
Do you prefer high risk, high reward?
Can you afford higher payments if necessary?
Choosing a variable rate can be see as taking a educated gamble. If you can see the market interest rate going down, you take it. If not, fixed interest rates might be a better choice.
Since variable rates can go up, just as fast as they can go down, would you be financially ok with an increase in monthly payments? With my clients, I take a look at their GDS and TDS to help determine the risk. If you maxed out your TDS, and have no other sources of income, maybe a fixed interest rate is a better choice.
Do you know when to lock in your rate if necessary?
Depending on your financial institution and the terms of your contract, some banks will allow to lock in the current rate. This means you have the flexibility of having a lower rate, and then getting a fixed rate when mortgages start rising. This does take a lot of understanding of the market, and can be hard to determine when is the best time.