Apply for more info. If you plan to move before the five-year ARM resets, you are going to save a lot of money on interest. Mortgage rates are at an all-time low and Canadians will have to decide whether 2021 is the year to lock in a fixed rate, ride out the variable, pay down their debt, invest or simply save. While many will choose to remain in a variable rate for the entire term, one of the fundamentals of a variable rate is the ability to lock into a fixed rate and I believe that there will be a best time to make this transition. A variable mortgage rate changes based on the mortgage lender’s prime rate. Then using prepayments, boost the variable payment  by $72 per month to $1,342 – the same payment as you would have been making on the fixed rate. Non-collateral mortgage. ’, when breaking their mortgage for any number of reasons: While a discussion of penalty details is beyond the scope of this article, the point is that most variable rate mortgages (the ones without terrible fine print) will only ever charge 3 months interest penalty if you end up breaking the mortgage. From a historical perspective, variable mortgage rates cost less in interest over the course of a mortgage's amortization, and are generally priced lower than their fixed counterparts. The 3 month interest penalty is far lower – often to the tune of thousands of dollars lower than comparable fixed rate mortgage penalties. The points mentioned so far mainly apply to the period where you are in a variable rate. You can lock the variable rate into a fixed rate at any time, without breaking the mortgage. However, some lenders with the absolute lowest rates will charge a 3% penalty to leave the variable rate. On a side note, some will point to the period of higher interest rates during the 1980s and 1990s as a reason to avoid a fixed rate. Typically, the variable rate is lower than fixed, but can also float higher for periods. The economy indeed can be thought of like a giant ship that can take a while to turn around. For example, if the current prime mortgage rate is 2.45 %, the holder of a prime minus 0.5 % mortgage would pay a 2 % variable interest rate. So an important financial planning strategy is to remain flexible and agile to help accommodate changes. Variable Rate. A … How does one measure peace of mind? You notice that in late 2019, as well as once in 2007, 5-year variable rates were higher than fixed rates. However, as we will review below, we live in a very different, debt-laden economy now whereby the effects of a 1%  higher Central Bank rate can have 5 – 10 times the economic impact as a 1% higher rate did in the 1980s. There is one golden aspect of a fixed mortgage rate that is hard to put a price on: peace of mind. To summarize, I believe that fixed rates over the next 1-2 years will generally trend down as the economy stabilizes after coronavirus and that this trend will present us with an ideal time to lock into a fixed rate. Whilst there are a number of different mortgages available, there are two main types of mortgage deal to choose from: fixed rate … A fixed mortgage rate gives you a bit more comfort and security knowing what your monthly payments will be each month for the duration of your term. Fixed rate or Variable rate. Using the example from earlier, let’s say your mortgage rate is at 3.25% and the Bank of Canada raised interest rates by 25 … and payment you make each month will stay the same for the term of your mortgage With a variable-rate mortgage, the mortgage rate will change with the bank’s prime lending rate. Using data from 1950 – 2000 the study includes a period of high market volatility in the 1980s and 1990s where mortgage rates were much higher than they are at present. Don't panic, you're not expected to repay your mortgage in full. In 2021 as the effects of coronavirus sweep through the Canadian economy, we will see that, even though fixed rates are now at all-time lows and are a fantastic solution for many, the answer for most people, is still variable. One of the first decisions homebuyers and mortgage shoppers face is whether to select a fixed rate or variable rate mortgage. A variable rate mortgage often allows the borrower to take advantage of lower rates – the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus or plus a set percentage. If you sell the home and break the mortgage, the penalty is 3 months interest. What are variable-rate mortgages? Eases budgeting anxiety and offers stability. Variable-rate mortgages will fluctuate. Conversely, when inflation is low, the Bank of Canada will decrease the prime rate to stimulate the economy and improve the attractiveness of borrowing. If you have the ability to absorb an increase in your payments in the event of a rate hike. More than 50% of Canadians have fixed mortgage rates, which means the monthly payment stays the same over the full term. Fixed-rate mortgages, on the other hand, offer borrowers a chance to lock in the mortgage rate charged on the loan for a specific period of time (known as a term). Variable Mortgage vs Fixed: 5 Reasons Why Variable is Better in 2021 Variable is Historically and Statistically Shown to Cost Less than Fixed. It’s nearly impossible to measure and the value of it can be near infinite. Refinance during the term by adding to the mortgage amount, with NO PENALTY. Here’s an example: if a bank advertises a rate of prime -0.1% and the prime rate is 3%, your interest rate would be 2.9% at the start of your mortgage term. This means that your amortization period (the number of years you’ve … For many, the key to implementing the best variable rate strategy will be selecting a good mortgage partner. Effects of COVID and Why the variable rate should not increase any time soon. Fixed rate home loans have predictable repayment amounts over the fixed term, variable rate home loans do not. How to effortlessly determine when to switch into a fixed rate. The average rate for the benchmark 30-year fixed surged 14 basis points to 2.79%, according to Freddie Mac’s Primary Mortgage Market Survey.This time … You may want a closed variable rate if… If you believe that interest rates will drop, and you can enjoy that benefit. Low penalty to break. If interest rates go down, more of the payment is applied to reduce the principal; if rates go up, … While a discussion of penalty details is beyond the scope of this article, the point is that most variable rate mortgages (the ones without terrible fine print) will only ever charge 3 months interest penalty if you end up breaking the mortgage. WATCH: When it comes to mortgage rates, fixed rates are usually more costly than variable ones, because so … . Fixed rate refers to the interest rate that remains unchanged for the entire mortgage term. A system in place to help communicate ongoing rate advice in a timely manner, so you don’t need to constantly watch rates. The Central Bank of Canada will not likely start to increase rates until the economy begins to grow at a stable pace, which is still likely 2-3 years down the road. Variable rate mortgage products appeal to some people because the rate is calculated based on prime rate and is typically lower than the fixed rate. 30-year Fixed-rate Mortgages. So even though, at the time of writing, 5 year fixed rates are in the 1.39% – 2.00% range, without the loss provision/ risk premium that lenders have added, rates would be approximately 0.25% – 0.50% lower for 5 year fixed rates. Importantly, it also offers absolute predictability and peace-of-mind. Fixed Rate vs. Non-collateral for maximum flexibility at end of term. Fixed Mortgage Rates; Fixed Payments for the Mortgage Term. Depending on your loan-to-value ratio, the variable rate you are offered may differ. The rate floats or changes over time, with decisions from the Bank of Canada. Full feature mortgage with excellent fine print flexibility. Fixed rate vs variable rate savings accounts Choosing the right account for your savings can make your money work harder and help you reach your goals faster. Fixed and Variable Mortgages Compared. A fixed-rate loan may suit you better if you don’t want any surprises in your monthly payments, and you are consistent in how you manage your debt. Copyright 2012 - 2017 Avada | All Rights Reserved | Powered by, In 2021 as the effects of coronavirus sweep through the Canadian economy, we will see that, even though fixed rates are now at all-time lows and are a fantastic solution for many, the answer for most people, is still. When deciding between a fixed or variable rate mortgage, you'll need to decide which one works for your lifestyle and how comfortable you are with the fact that your interest rate could change during the term of your mortgage. Variable-rate mortgage holders stand to benefit most from this low rate interest environment over the next 2-3 years. By and large, fixed mortgage rates follow the pattern of Canada Bond Yields, plus a spread, where bond yields are driven by economic factors such as unemployment, export and inflation. However, this is not always the case, as illustrated in the chart below. With a variable-rate mortgage, you agree that the interest rate can be changed in reaction to movements in the economy. The variable vs fixed mortgage rate decision is one of the biggest a borrower will make when selecting their mortgage. Many savings accounts come with either a variable interest rate, or fixed interest rate. Variable rates tend to be slightly lower than fixed rates at any given time, because they are inherently less risky for lenders. The strategy here will show you how to lower your risk on a variable mortgage while also setting you up to save substantially on interest over time. It makes borrowing more attractive, so people borrow more, and spend more with this borrowed money – and this boosts the economy. As the effects of COVID, unfortunately, continue to take their toll on the broader Canadian and global economy, it is likely that, as of 2021, it will take several years for the economy to stabilize and then begin to grow again. Consider the financial uncertainty: significant increases in the prime rate will increase your interest payable and, thus, financial burden. Whilst there are a number of different mortgages available, there are two main types of mortgage deal to choose from: fixed rate and variable rate mortgages. Currently, the best rates I could find on a variable rate mortgage was 2.9%. If the rates go up, they simply pay more interest instead of direct to the principal loan. We stay in touch, so they don’t have to do any extra legwork after their mortgage closes. But even experts remain divided on which type is best given today’s low interest rate environment. Variable rate mortgages; Fixed rate mortgages; What is better a fixed rate or variable mortgage; Variable rate mortgages. A variable rate mortgage often allows the borrower to take advantage of lower rates – the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus or plus a set percentage. I estimate that this risk premium is currently causing fixed rates to be anywhere from 0.25% –  0.50%  higher than they would be under normal economic circumstances. Fixed Mortgage Rates. Payments are generally fixed over a period of time (eg. As an example, let’s compare the cost of a five-year variable-rate mortgage, versus a 3 per cent fixed-rate mortgage. Together, combinations of unemployment, export, and manufacturing values shape the inflation rate. Selecting a good mortgage broker will help you get the best rate with ease. Closely related to lowering risk as seen in the last point, the lower penalties and increased flexibility built into a variable rate mortgage are a cornerstone of a variable rate. Historical, long term evidence of variable rate cost savings. , at 66% of total mortgages, are most common; however, 29% of mortgages, a significant minority, do have variable rates A variable mortgage rate changes based on the mortgage lender’s prime rate. Choosing between a fixed-rate and variable-rate mortgage requires plenty of thought on your part before you decide to commit to the loan. A fixed interest rate is guaranteed not to change for the length of time you have agreed to fix it for - typically anywhere from 1 to 5 years. If the difference between the variable and fixed rate is significant, it may not be worth paying a premium for the stability protection of a fixed rate. Select Your Payment Schedule. The variable rate mortgage is, in many cases, the right financial tool to help accommodate these changes. When interest rates are low and are not expected to fall further, it is generally advised to lock in a fixed rate, as variables rates will, at best, stay the same, or increase. A stabilizing economy that lenders feel more comfortable with. Fixed rate mortgages keep your mortgage repayments predictable and stable. Your rate will be fixed for a much shorter period, typically five years, after which you’ll need to renew your mortgage with a fresh deal. Your monthly payment remains fixed even if interest rates rise, as long as the amount is sufficient to cover the interest cost. Accordingly, the mortgage payments also remain the same throughout the term. Examined historically, variable rates have proven to be less expensive over time. For example, if interest rates remain at ultra-low levels for the next two years, and then threaten to increase – at this point it would be a good time to switch to a fixed rate. At Altrua, with our deep knowledge of the economic factors that affect/change mortgage rates, one of our specialties is helping our customers to determine when to lock in a rate. YouTube, All Mortgage Rates are subject to change and are available OAC. I have attempted to show why and how a borrower is likely to save money with a variable rate-fixed rate timed strategy, however what’s the point in saving money if you’re constantly stressed out about it. Fixed-rate mortgages are what they say on the box — your rate and monthly payments remain the same throughout your mortgage term. According to the MPC report, the average difference between a fixed and variable mortgage rate in 2018 was 0.55%, representing an $85-per-month difference in payments. Contact Us Variable Mortgage Rates vs Fixed Mortgage Rates. For example, if the current prime mortgage rate is 5.5 percent, the holder of a prime minus 0.5 percent mortgage would pay a 5.00 percent variable interest rate. 20% per year prepayment. That means your payments, stay the same every month regardless of changes to interest rates. Therefore, I contend that unless we see substantial economic GDP growth and inflation, we are not likely to see the kind of high rates that were seen in the 1980s and 1990s. Excellent, full feature mortgage that provides a very flexible two-year term. Some lenders will offer a very high fixed rate if you decide to use the lock-in feature. Select a lender with a good fixed rate discount to make locking into a fixed rate much more cost-effective. Though the prime lending rate may fluctuate, the relationship to prime will stay constant over your term. A variable rate mortgage increases and decreases over the duration of your mortgage term as the prime rate of the mortgage lender goes up and down. 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