Fixed or variable rate mortgages: to lock in or not?

Find out which mortgage rate is right for you

Finding your dream home is easy – paying for it is the hard part! While we'd all prefer to spend our time looking at paint samples and shopping for new furniture, the truth of the matter is, we need to dedicate more time to financial research. There are a wide variety of mortgage products available to Canadian homebuyers, each offering its own unique advantages and disadvantages. The following are the two most common mortgage options available.

Fixed Rate Mortgages

If your home buying budget is tight, make sure you ask your broker to keep an eye out for competitive fixed rate mortgages. A fixed rate mortgage is a mortgage where the rate of interest is locked in for a specific period of time. This time span is known as the mortgage term, and can range from 6 months to 25 years. As time goes on, more of your monthly or biweekly mortgage payment will go directly towards the mortgage principal and less towards the interest.

Variable Rate Mortgages

A variable rate mortgage, also known as a floating rate mortgage, involves fixed payments; however, the interest rate is not locked in, so it can fluctuate quite dramatically over time. The nice thing about a variable rate is that if ever interest rates go down, more of your regular payment will go towards the mortgage principal, rather than to interest. If you need help understanding how a variable mortgage rate works, try using an online mortgage calculator to crunch some numbers and review different scenarios.

Which mortgage rate makes sense?

Variable mortgages can be risky, but risk isn't necessarily a bad thing. Variable mortgage rates are a good option for more mature buyers - i.e. you ladies with lots of home equity! A variable rate is also a good fit for individuals who are able to front a considerable down payment (over 20% of the asking price). Variable mortgages are a popular option when the economy is in poor shape. The Bank of Canada is less likely to raise their rates during a time of economic uncertainty, as this could have a negative impact on the housing market and spark a string of foreclosures.

A note on risk

When considering whether or not you're comfortable with a variable mortgage rate, it's always a good idea to review historical rates. Back in 2000, a detailed study of variable rate mortgages was completed by Moshe Arye Millevsky of York University. This study showed that consumers were actually better off, on average, financing their mortgage with a short-term floating interest rate, rather than locking in at a fixed rate. With risk comes reward, so make sure to discuss all of your options prior to finalizing your mortgage rate.