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Variable Rate vs. Fixed Rate
Variable rate and fixed rate mortgages both have their pros and cons. Here's a quick summary of the differences between the two:
|Variable Rate Mortgage||Fixed Rate Mortgage|
|What is it?||A mortgage where the interest rate varies month-to-monthy based on market conditions.||A mortgage where the interest rate stays 'locked in' for longer periods of time.|
|What's the payoff?||Your rates are usually lower, so you normally pay less interest, but there's no guarantee.||There's security in knowing that your rates and payment amounts will not change until renewal time.|
|What are the risks?||You're not insulated from spikes in mortgage rates. If rates shoot up, you could be paying more interest.||Fixed rates are set higher than variable rates because they compensate for prospective rate spikes. In addition, if rates drop, you can't take advantage of the savings without refinancing.|
|Can you switch mid-term?||If you have an open variable rate mortgage, yes, you can switch. If your mortgage is closed, then not without paying penalties. Most variable rate mortgage products are closed, but most allow you to lock-in to a fixed rate mid-term.||Like variable rate mortgages, this depends on whether the mortgage term is open or closed. Open term fixed rate mortgages are far less common than those with closed terms.|
|Which is best?||York University found that over the last half century, nine times out of ten, Canadians paid less interest using variable rates.||If rates are expected to rise, it can be beneficial to lock in to a fixed rate before the banks actually raise their rates.|
|Current rates:||Current variable rate: 2.36%||Current 5 year fixed rate: 3.09%|
So which is better?
Both variable and fixed rate mortgages have their advantages, but in many brokers' opinions, the scale is often tipped in favor of lower interest paid over the long-run, which has a lot to do with the interest rates.
In the last 50 years, variable mortgage rates have been lower on average than fixed mortgage rates, but as the financial adage contends: past performance is no indication of future results; so the answer to which is better isn't as simple as looking at which mortgage rate is lower now, or which mortgage rate has been lower, historically.
In the the end, determining whether a fixed or variable rate mortgage is better is an exercise in speculation, experience, and consideration of tolerance for risk. This is why it's often important to involve an experienced broker or your financial planner.
Hybrid Mortgages: The Halfway Point
A newer form of mortgage has been gaining traction in the last decade, known to the industry as hybrid mortgages. Hybrid mortgages meld many aspects of both traditional fixed rate mortgages and variable rate mortgages.
Hybrid mortgages work by associating part of the loan amount with a fixed rate, and the rest with a variable rate. This gives hybrid mortgages a sort of variable/fixed duality that, in theory, gives you the advantages of both, and provides some flexibility in terms of how much risk you're willing to assume.
Much like variable rate mortgages, hybrid mortgages allow you to take advantage of decreasing prime rates. When the prime rate drops, the portion of the mortgage using the variable rate will begin to accrue interest at a lower rate, which is great. If the prime rate increases, the portion of the mortgage that is fixed will help to anchor the hybrid mortgage so that your mortgage payment doesn't skyrocket.
If you would like to apply for a hybrid mortgage, Super Brokers has unique expertise in this area.