Fixed vs Variable mortgages
You have to decide between a fixed rate term or a variable rate term and anything from a 6 month agreement to a 10 year agreement. In some cases you might even have the option to choose an open term mortgage (no pre-payment penalties) however, don't expect an open term mortgage to be available and if it is, the rate will be much higher (usually at least double).
Fixed Rate Terms...
Understanding a fixed term mortgage is pretty easy. You decide on the length of the term you want and you know exactly what your interest rate and payment will be for that time. Variable rate mortgages come with the uncertainty of knowing what your interest rate and payment will be, which is why this post primarily focuses on explaining variable rate mortgage agreements.
Variable Rate Terms...
When it comes to variable rate mortgages, the first thing to know is that they don't change as often as most people think. Your interest rate only changes when your lender changes their prime lending rate and as an example, the big 6 (chartered) banks have only changed their prime rate 10 times in the last 120 months (10 years) with 8 of those changes happening directly after the real estate boom in 2007 when rates dropped dramatically (per chart below). Generally, all lenders follow each other in deciding their prime lending rate and when to change or not change.
Rate changes in the last 7 years haven't been more than 0.25 - 0.5% at a time. Global economic turmoil is what caused the more dramatic rate changes in 2008. You can expect similar increments if rates go up at some point so, chances are you'll still be at or below where you started if you had chosen a fixed rate mortgage instead.
Another good point to keep in mind is that mortgage lenders allow you to swap into a fixed mortgage at any point in your mortgage term. So if you decide to change your mind later, you can. The only catch here is that you're subject to the fixed rates available at that future date vs now.
Another common misconception is that you'll wake up one day and find out your interest rate and mortgage payments are changing without notice. This is false. You'll have plenty of advanced notice. First, you'll hear about the BoC rate change in the media. Around the same time, you'll be notified by your mortgage broker. Then, some time before your next mortgage payment is due, you'll receive notice from your lender. So you can decide on opting for a fixed rate long before you make your next payment (maybe not so much if you opt for weekly payments).
There's another potential cost saving advantage to variable rate mortgages and that's the potential pre-payment penalty. If for any reason you need to pay any portion of your mortgage over and above your pre-payment privileges before the end of your term, you're subject to paying a penalty which is the greater of 3 months worth of interest or an Interest Rate Differential (IRD). An IRD penalty can be much large than 3 months interest in many cases and depending on the particular lender. In a variable rate mortgage, you only have to pay 3 months interest if you pre-pay early
My advice... If you like saving money and you like a little more flexibility, consider a variable interest rate. If you've read this article, you'll hopefully be more clear about them than before. Yes, shorter fixed term mortgages offer lower interest rates as well but, they're usually not as low as a variable, you'll have more work renewing your mortgage more often (Vs every 5 years) and you may be faced with a larger pre-payment penalty.
Either way, if you have a mortgage broker working for you, you can rest easy knowing you're already getting a better rate than going to your own bank or credit union branch, and we can still help guide you to make the best decision for you.
Need more advice? Shoot me an email (ian@skmortgage.net) or give me a call (306-596-3121).
Ian Leverington, Mortgage Associate
Verico Crown Mortgage Services Inc.
Another good point to keep in mind is that mortgage lenders allow you to swap into a fixed mortgage at any point in your mortgage term. So if you decide to change your mind later, you can. The only catch here is that you're subject to the fixed rates available at that future date vs now.
Another common misconception is that you'll wake up one day and find out your interest rate and mortgage payments are changing without notice. This is false. You'll have plenty of advanced notice. First, you'll hear about the BoC rate change in the media. Around the same time, you'll be notified by your mortgage broker. Then, some time before your next mortgage payment is due, you'll receive notice from your lender. So you can decide on opting for a fixed rate long before you make your next payment (maybe not so much if you opt for weekly payments).
There's another potential cost saving advantage to variable rate mortgages and that's the potential pre-payment penalty. If for any reason you need to pay any portion of your mortgage over and above your pre-payment privileges before the end of your term, you're subject to paying a penalty which is the greater of 3 months worth of interest or an Interest Rate Differential (IRD). An IRD penalty can be much large than 3 months interest in many cases and depending on the particular lender. In a variable rate mortgage, you only have to pay 3 months interest if you pre-pay early
My advice... If you like saving money and you like a little more flexibility, consider a variable interest rate. If you've read this article, you'll hopefully be more clear about them than before. Yes, shorter fixed term mortgages offer lower interest rates as well but, they're usually not as low as a variable, you'll have more work renewing your mortgage more often (Vs every 5 years) and you may be faced with a larger pre-payment penalty.
Either way, if you have a mortgage broker working for you, you can rest easy knowing you're already getting a better rate than going to your own bank or credit union branch, and we can still help guide you to make the best decision for you.
Need more advice? Shoot me an email (ian@skmortgage.net) or give me a call (306-596-3121).
Ian Leverington, Mortgage Associate
Verico Crown Mortgage Services Inc.
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