If you’re considering getting a mortgage in Canada, you’ve likely heard the terms “fixed” and “variable” thrown around. While fixed-rate mortgages are fairly straightforward, variable mortgages can be a bit more complex. In this article, we’ll explain what a variable mortgage is, how it works, and whether it might be the right choice for you.
A variable mortgage, also known as a floating rate mortgage, is a type of mortgage where the interest rate can fluctuate over time. This is in contrast to a fixed-rate mortgage, where the interest rate stays the same for the entire term of the loan.
Variable mortgages are typically tied to the prime rate, which is the interest rate that banks charge their most creditworthy customers. The prime rate is influenced by a variety of factors, including the Bank of Canada’s overnight lending rate, inflation, and the overall state of the economy.
When you take out a variable mortgage, your interest rate will initially be set at a certain percentage above or below the prime rate. For example, your lender might offer you a variable rate mortgage with an interest rate of prime minus 0.5%. This means that if the prime rate is 3%, your interest rate would be 2.5%.
Over time, however, your interest rate will likely fluctuate as the prime rate changes. This means that your mortgage payments could go up or down, depending on the direction of interest rates.
So why would someone choose a variable mortgage over a fixed-rate mortgage? There are a few advantages to consider. Firstly, variable mortgages typically come with a lower initial interest rate than fixed-rate mortgages because they are tied to the prime rate. Secondly, if interest rates go down over time, borrowers with variable mortgages could end up paying less in interest overall than they would with a fixed-rate mortgage. Finally, variable mortgages often come with more flexible terms than fixed-rate mortgages, such as the ability to make extra payments or pay off the mortgage early without penalty.
Of course, variable mortgages also come with some risks to consider. Firstly, because your interest rate can go up or down over time, there’s always the risk that your mortgage payments could increase. This can be difficult to budget for, especially if you’re on a fixed income. Secondly, with a fixed-rate mortgage, you know exactly what your payments will be for the entire term of the loan. With a variable mortgage, there’s always a degree of uncertainty about what your payments will be in the future. Finally, if interest rates go up over time, borrowers with variable mortgages could end up paying more in interest overall than they would with a fixed-rate mortgage.
So, is a variable mortgage the right choice for you? Ultimately, it depends on your individual financial situation and risk tolerance. If you’re comfortable with the potential for fluctuating payments and believe that interest rates are likely to stay low or even decrease over time, a variable mortgage could be a good option. However, if you prefer the certainty of fixed payments and want to avoid the risk of rising interest rates, a fixed-rate mortgage might be a better choice.
In conclusion, variable mortgages can be a great option for some borrowers, but they come with risks and uncertainties that need to be carefully considered. If you’re thinking about getting a variable mortgage, it’s important to do your research and talk to a mortgage professional to make sure it’s the right choice for you.
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