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One of the first decisions homebuyers face is whether to select a fixed rate or variable rate mortgage.

Fixed mortgage rates are more popular and represent about 65% of all mortgages in Canada. With a fixed mortgage you can “set it and forget it” as you are protected against interest rate fluctuations, so your payment stays constant over the duration of your term.

Variable mortgage rates are typically lower than fixed rates, but can vary over the duration of the term. Variable mortgages are prone to market behaviour (via the prime rate) which affects your payments. That means your payment amounts can change over time. A fixed mortgage offers stability as your mortgage rate and payment will remain the same each month, but that security is the reason why fixed interest rates are higher.

As a safe guard rules have recently changed, now variable rate borrowers must qualify based on the posted Chartered Bank Benchmark rate (currently 4.64%). This may make a variable rate mortgage unattainable for many first time buyers.

With a fixed rate mortgage, the mortgage rate and payment you make each month will stay constant for the term of your mortgage. With a variable rate mortgage, however, the mortgage rate will change with the prime lending rate as set by your lender. A variable rate will be quoted as Prime +/- a specified amount, such a Prime – 0.45%. Though the prime lending rate may fluctuate, the relationship to prime will stay constant over your term. For example, a variable rate could be quoted as prime – 0.7%. So, when the prime rate is, say, 3%, you will pay 2.3% (3%-0.7%) interest.

The prime lending rate is dependent on the state of the current economy, which is determined by economic factors like inflation and unemployment. When the inflation rate is high, then the Bank of Canada will, of course, make increases to the prime rate in order to make borrowing money much more expensive. When the inflation is lower, the prime rate will be decreased in order to stimulate and improve the economy as well the appeal for borrowing.

–So how do you choose? 
One of the quickest ways to determine if a variable-rate mortgage product is right for you is whether or not you can afford rate increases.  The first thing you should assess is your current income, earnings and potential for increase of earnings, can you weather payment increases or decreases.  If you can comfortably afford mortgage rates that are two per cent higher than what you’d pay on your variable, then you may be OK. But proceed with caution. Rates right now are at historic lows. So low that it’s quite conceivable you could see rates double before your term is up.

Understanding the risk involved is a prerequisite.  If you’ve decided you can afford a variable-rate mortgage, the next thing you will want to determine is if a variable-rate mortgage fits your personality. If you’re the type of person who can’t sleep at night knowing your rate may go up, even slightly, a variable-rate mortgage may not be the best option for you.

The bottom line:
Long term stability has a price, but if you can’t sleep, what good’s the money?…

Contact us to review your best options.