Fixed or variable mortgage? – Mortgage issues

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If you’re looking to buy a new home, refinance your current mortgage to access equity, or your mortgage needs to be renewed, you may be trying to decide whether you should go with a fixed rate mortgage or a mortgage. at variable rate.

What is the best option? It really is up to you, but make sure you make that decision with all the information as there are some important differences between these two types of mortgages.

The biggest difference is how the prepayment penalties are calculated. Statistics show that the average mortgage is broken at the 38-month mark, despite most banks promoting five-year fixed-term mortgages.

The maximum amount of the interest penalty on a variable rate mortgage is three months interest, while a fixed rate mortgage penalty is either the interest rate differential or three months of interest. , depending on the higher amount and sometimes, depending on the lender, the interest rate differential penalty can be very high. high.

A variable rate mortgage is based on the bank prime rate, which financial institutions charge consumers. Bank Prime is based on the central bank rate (the amount of interest the Bank of Canada charges financial institutions for short-term loans).

As the central bank rate goes up or down, so does Bank Prime and, in turn, the variable rate with home equity lines of credit, student loans, etc.

A five year fixed rate mortgage is based on the bond market. As the bond market goes up or down, so does the five-year fixed rate.

A few years ago, it was clear that opting for an adjustable rate mortgage would save consumers money. But the steep discounts on fixed-rate mortgages and the narrowing of the spread between short-term and long-term interest rates have made the choice less obvious today.

Instead of trying to guess where the tariffs are going, consumers are better off thinking about their own situation. They must assess their personal balance sheet and risk tolerance.

The decision to choose between short (variable) or long (fixed) will depend on consumers’ tolerance for risk as well as their ability to withstand possible increases in mortgage payments.

The first-time home buyer or those with a minimum down payment are ideal consumers for a long-term fixed mortgage rate.

Keep in mind that variable rate mortgages allow consumers to get fixed at a fixed rate at any time and at no cost. While there is no upfront cost for the change, not all lenders will see the rate fully reduced.

Consumers should be sure to ask their lender if they’ll get the same fully discounted fixed rate if they decide to lock in when you first take out your mortgage.

There are many lenders available through mortgage brokers who will offer you their best low fixed rates if you decide to go locked in. An important consideration if you have an adjustable rate mortgage.

I typically place my clients with non-bank lenders that don’t have a posted rate if they choose a variable rate mortgage.

If they decide to lock in at some point during the term of the mortgage, the best fixed rate mortgage will be offered unlike a bank lender where the locked in rate may not necessarily be fully discounted.

Your goal for your mortgage should be to pay as little interest as possible. Therefore, if you need to cancel your mortgage, an adjustable rate mortgage will usually cost you less.

So the answer to whether you should take out a fixed rate mortgage or an adjustable rate mortgage – it depends!

If you have reached your maximum purchasing power or are worried, lock yourself in, forget about it and enjoy life.

If you would like to take advantage of the many strategies available to maximize the current low rates available on a variable rate mortgage, please call me at 1-888-561-2679 or email me. [email protected] and we can examine your personal situation.

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