Whether you’ve just started looking for a new home or you’ve already found the perfect one, the next step is to determine how you want to finance it. At some point, you’ll be faced with choosing between a fixed or variable rate for your mortgage term. It’s a considerable decision that can affect you for years to come, and has the potential to make a difference of thousands of dollars in interest over the mortgage term.
Fixed-rate mortgages lock in your interest rate for your mortgage term, which means your principal and interest vary from month to month, but your total borrowing cost is fixed.
1 – 5 year term
Guaranteed rate of interest, and set payment amounts for a specified period of time based on your term
Peace of mind — set it and forget it
Easier to understand and compare between mortgage lenders
Protected from rising rates throughout the term length
Penalties for breaking your mortgage or making early payments above your 20% prepayment privileges
If rates decrease, you won’t take advantage of lower rates
Fewer opportunities to make changes unless you add funds to your mortgage or move to another property
With variable-rate mortgages, your interest rate will change over the term, which means the amount you pay for principal and interest fluctuates. The Bank of Canada sets this amount based on various economic factors.
Pay your home off faster if rates decrease
Flexibility to lock into a fixed-rate term at any time
Historically lower interest rates
- No penalty for additional or prepayments with a variable open mortgage
- Interest rates can go up any time during the term
Difficult to plan exact payment amounts
If rates increase, more of your payment goes toward interest, and less to your principal
Things to consider
Some of these questions can be answered on your own, and others may be best to discuss with a lending specialist.
How large of a monthly payment can you afford today?
The type of mortgage you choose will affect your monthly payments, which is why you need to determine how much you want to spend in a month. You'll also want to factor in extra costs, including property taxes and day-to-day home expenses. If you choose a fixed mortgage rate, you can budget for a set cost, since your principal and interest rates won't change. If you can afford fluctuations in principal and interest payments, you may want to consider a variable-rate mortgage.
Can you still afford this payment if interest rates increase?
Taking a critical look at your budget will help determine a range of affordability and help inform your comfort with uncertainty — a key factor when deciding between a fixed or variable-interest mortgage.
How long do you intend to live in your home?
Is this your starter home, your forever home or something in between? Your goals and stage of life play an important role in determining what type of mortgage is the best fit.
Where are interest rates heading, and how long will this trend continue?
Fixed-rate mortgages are a great option when interest rates are expected to rise, and your best bet if you’re risk-averse. You can take comfort in knowing exactly how much equity you’ll build by the end of your term. Variable rate mortgages could be your best bet in a declining interest rate market because you’ll build more equity as rates decrease.
COVID-19: Is now a good time?
The effects of COVID-19 have been broad and deeply felt, affecting many facets of life across Canada. In September 2020, the Bank of Canada made the decision to hold its prime rate at 0.25% as the Canadian economy remains in recovery.
In a speech to the Canadian Chamber of Commerce on September 10, 2020, Governor of the Bank of Canada, Tiff Macklem, confirmed that the economy will continue to require monetary support, and that maintaining low interest rates will bring greater certainty to those who have a mortgage, and to those looking to finance a new home.
"If you've got a mortgage or if you're considering making a major purchase, or you're a business, and you're considering making an investment, you can be confident that interest rates will remain low for a long time," he said.
Take the next step
When it comes to finding the perfect mortgage solution for your home, it always helps to have an expert in your corner who can help inform your decision-making. Whether you're buying, building or renovating, SCU is here to provide expert advice and guidance to help you find the right solution. Fill out our contact form or call us at 1.800.728.6440.