When it comes to purchasing a home in Ontario, one of the most crucial decisions you’ll face is choosing between a variable rate and a fixed rate mortgage. Both options have their advantages and disadvantages and understanding the differences between them can help you make an informed choice that aligns with your financial goals and risk tolerance. In this post, we’ll compare variable and fixed rate mortgages, shedding light on the benefits and drawbacks of each to aid you in making the right decision for your homeownership journey.
VARIABLE RATE MORTGAGES
1. Variable rate mortgages, also known as adjustable-rate mortgages (ARMS), have an interest rate that can fluctuate over time based on changes in the market interest rates. Typically, variable rate mortgages are tied to the Bank of Canada’s overnight rate, which influences the prime rate offered by major financial institutions in the country. Here are some key points to consider.
ADVANTAGES:
a. Lower Initial Rates: Variable rate mortgages usually start with a lower interest rate than fixed rate mortgages, making them an attractive option for borrowers seeking more affordable monthly payments at the beginning of the loan term. (This is not always the case however, please check with a mortgage professional.)
b. Potential Savings: If market interest rates decrease, borrowers with variable rate mortgages can benefit from lower interest charges and potentially save money over the term of the loan.
DISADVANTAGES:
a. Rate Volatility: One of the biggest risks associated with variable are mortgages is their inherent unpredictability. As interest rates fluctuate, your monthly payments can change, potentially making budgeting more challenging.
b. Financial Uncertainty: Variable rate mortgages may not be suitable for risk averse borrowers who prefer stable predictable payments.
FIXED RATE MORTGAGES
1. Fixed rate mortgages on the other hand, come with an interest rate that remains constant throughout the entire loan term, offering borrowers a predictable monthly payment. The interest rate is determined at the beginning of the loan and does not change, regardless of any fluctuations in the market interest rates. Here are the main aspects to consider:
ADVANTAGES:
a. Predictable payments: With a fixed rate mortgage, homeowners can accurately budget their monthly expenses as the payments remain constant over the loan’s lifespan.
b. Rate Stability: Fixed rate mortgages shield borrowers from sudden increases in interest rates, providing financial stability and peace of mind.
DISADVANTAGES:
a. Higher Initial Rates: Compared to variable rate mortgages, fixed rate mortgages often start with higher monthly payments initially (this has not been the case as of late, as variable rates have sharply increased with the Bank of Canada’s increases)
b. Missed Savings Opportunities: If market rates decrease significantly after obtaining a fixed rate mortgage, borrowers will not be able to take advantage of the lower rates unless they refinance the loan.
1. CHOOSING THE RIGHT OPTION
The decision between a variable and fixed rate mortgage ultimately depends on your unique financial situation, risk tolerance and long-term goals. Consider the following factors when making your choice:
a. Financial Stability: If you prefer a predictable budget and want to safeguard against potential interest rate hikes, a fixed rate mortgage may be the better option.
b. Short-term vs. Long-term: If you plan to sell your home or refinance within a few years, a variable rate mortgage could be beneficial due to (potentially) lower initial rates.
c. Risk Tolerance: Assess your comfort level with fluctuations in monthly payments and your ability to absorb potential rate increases.
CONCLUSION
Both variable rate and fixed rate mortgages offer distinct advantages and drawbacks for homebuyers in Ontario. The decision between the two comes down to individual circumstances and preferences. A variable rate mortgage can provide initial cost savings and potential benefits from rate decreases, but it comes with the risk of rate volatility. On the other hand, a fixed rate mortgage offers stability and predictability, but it may not capitalize on potential interest rate decreases.
It is essential to carefully weigh the pros and cons and consult with a qualified mortgage professional to make an informed choice that aligns with your financial goals and priorities. Ultimately, the right mortgage option will put you on the path to successful homeownership and financial security.