Many homeowners go through situations in their lives that make it difficult to make their mortgage payments on time. Sometimes mortgages can feel like a trap, leaving homeowners stuck with bills that never seem to end. It may be relieving to know that there are options for managing your mortgage. There are generally two ways mortgages are structured: fixed and variable. Choosing the option that is best for your needs and lifestyle is key to relieving the stress as you pay your mortgage. Here’s what you need to know about each kind, and which option may be the best for you.
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For homeowners who like simplicity, a fixed rate mortgage (FRM) would be the more desirable option. In this case, the interest rate you were quoted on your loan remains the same throughout the entire term of the loan. For instance, if you lock in with a five-year fixed rate mortgage at 3.5%, you will have the same monthly mortgage payments for the next 60 months. If interest rates increase at any point during your term, it won’t matter. Your monthly mortgage payments and the amount that goes toward the principle and interest, stays the same for five years. Due to the lack of uncertainty with fixed rate mortgages, it is the most popular option for Canadians right now.
A variable rate mortgage (VRM) also has a fixed term, but the interest rates change on a regular basis based on any movement of the prime lending rate or overnight rate. Some homeowners choose a VRM because they are told despite the inherent risk of a floating interest rate that they will save money in the long term. Unfortunately, this is not a guarantee. VRMs are designed either with fixed payments or fluctuating payments. If you want to pay the same amount monthly, the interest rate of that month will determine how much of your payment goes towards interest and how much goes to the principal. A VRM with a fluctuating payment will vary your mortgage wildly each month.
The main reason homeowners choose a FRM is because it is consistent and predictable. Homeowners who are comfortable with uncertainty may find VRMs more appealing, especially if they believe the prime lending rate will be decreasing soon. Since homeowners don’t need to lock in with one specific rate for a fixed term, VRMs could result in the borrower paying less interest overall compared to a FRM. However, the stress involved with different payments each month is not for everyone and given Canada’s current economic climate, it seems as if lending rates will continue to increase over the next little while.
There’s a good reason why the majority of residential mortgage loans are FRMs. New homeowners want the security and peace of mind that comes with knowing what they need to dish out each month for their mortgage. Surprises and paying fluctuating amounts each month is stressful and can make budgeting a challenge. Even though a VRM may be more affordable in the long-run (at the time of closing), the risk of the unknown is there every time the mortgage bill arrives.
If you have a tight or strict budget, VRMs are not the right choice for you. A VRM does not allow you to predict what your bill will be each month, while a FRM is the same amount each month.
Depending on how financially stable you are, how much money you have for your down payment, and if you are a low or high-ratio borrower, getting approved for a FRM may be easier than a VRM. If your income makes it difficult for you to absorb a rate hike, as is common with VRMs, a FRM may be preferable.
In terms of which option allows you to save more before your closing date, VRMs win. According to multiple studies, 90% of homeowners with a VRM paid less interest by their closing date. So, if you are financially stable and have extra funds to pay sudden increases in interest rates, a VRM has the potential to save you thousands of dollars over your mortgage lifespan.
FRMs tend to have higher penalties when you break them, than VRMs. If you know that you will likely move or sell your home before the end of your five-year fixed term, you should consider a shorter fixed rate term or choose a VRM.
If you plan to pay a hefty amount on your mortgage down payment or are renewing your mortgage and have a low balance, your risks with sudden interest spikes is significantly lower. In this case, a VRM can be very beneficial and easier to quality for.
In the past, the differences between these two options for similar durations was minor. However, after changes in the market, interest rates collapsed leading to the lowest mortgages rates we have seen in a long time. FRMs are now more attractive because homeowners pay much less to have fixed and stable payments. When the spread between FRMs and VRMs increases, VRMs become more attractive.
If you need assistance dealing with your mortgage, residential mortgage lawyers in Toronto can help you. Our lawyers for residential mortgage known the ins and outs of managing payments, buying, and selling property, and we provide reliable advice and assistance in navigating through the process. Zinati Kay – Real Estate Lawyers is a full service residential real estate law firm that provides fixed closing costs to buyers and sellers when they buy, sell, mortgage, or title transfer their property. We have been in business for 25 years and have closed over 21,000 real estate transactions. We have three lawyers to service our clients and were one of the first firms to provide fixed closing costs. We provide professional service and reasonable real estate lawyer fees and have thousands of satisfied clients to prove it. If you need any assistance, contact us at 416-321-8766 for more information about our services.
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