Once the mortgage for your home has been approved, the next step is deciding whether you want a variable or fixed rate mortgage.
It is important to take into account your overall personal finances before you sign your mortgage agreement, because the type of mortgage you choose can have significant effects on your budget in the short term. Here are the main differences between variable and fixed rate mortgages:
- Fixed rate mortgages have lower interest rates than variable rate mortgages.
- Fixed rate mortgages cost less over time.
- Variable rate mortgages can be negotiated before the end of its term and without any penalties. This is not the case with fixed rate mortgages
- The main advantage of a variable rate mortgage is that it can be reimbursed at any time without any penalties.
The classic case for a variable rate mortgage
Why would someone choose a variable rate mortgage when, upon initial consideration, a fixed rate mortgage is more cost-effective? Let’s say you want to sell your property in the short-term after renewing your mortgage or recently buying your home. The penalties for reimbursing the mortgage will become a major issue. One way to avoid these penalties is to opt for variable rate mortgage, because you can reimburse a part of or all of it without any penalties. Another solution is to use a home equity line of credit that also enables you to reimburse your mortgage, partly or in its entirety, without penalty.
For example, a fixed rate mortgage (1 year) was featured at 2.9% on our website on April 26, 2016, while the variable rate mortgage (1 year) was at 6%. While the rate for an open mortgage is higher, if you are planning to sell your property within the next few months and a penalty would cost you several thousand dollars, you may want to pay a little more interest to avoid any penalties.
Variable rate mortgages: reimburse your loan without restrictions
Choosing a variable rate mortgage can often be a good strategy if you think you may come into a lump sum of money (for example, if you are selling a secondary home, receiving an inheritance, coming to an agreement during a divorce, or claiming a loved one’s life insurance). A variable rate mortgage allows you to reimburse your mortgage loan in a very flexible manner.
In sum, remember that most people select fixed rate mortgages to pay for their homes. These types of mortgages are ideal for homeowners wanting consistent payment amounts that they can plan for—all while benefiting from a lower interest rate. However, we recommend contacting a broker to gain better insight into what mortgage option is right for you.
- Fixed rate mortgages have lower interest rates and are the most widely used option.
- Variable rate mortgages offer more flexibility and should be considered depending on your financial situation and short-term property plans.