Buyers often ponder what type of mortgage is best: variable rate or fixed rate. At first glance, a variable rate mortgage (VRM) look more attractive – as they are typically lower rate than a fixed mortgage. However, VRM’s fluctuate as banks adjust their prime rates to follow the Bank of Canada’s overnight rate. On the other hand, a fixed rate mortgage (FRM) offers the assurance that the rate will not change over the duration of the mortgage. A few lenders offer a hybrid mortgage, where the mortgage is a blend of VRM and FRM.
Things get even more confusing when deciding the term of the mortgage: 1, 3, 5 or more years? How about an open mortgage (which can be paid off any time) versus a closed mortgage (restrictions/penalties if paid down early)?
History has shown that over the term of the mortgage amortization, most of the time a VRM is cheaper that a FRM. However, when periods (such as now?) when the general consensus is that VRM’s and FRM’s are about to rise – locking into long-term FRM may be the better choice.
It is worth considering what happens if paying off the mortgage early, whether: renewing before the term is up (to “lock in” a lower rate), switching mortgage providers, or even selling the property. Check the fine print for each mortgage provider, but typically if the terms of a VRM are broken early, just 3 months interest are charged as a penalty. For a FRM, a hefty Interest Rate Differential (IRD) is typically charged by the lending institution. The IRD can range from a few $1000’s to $10,000’s – so if there is a chance that you will be wanting to “get out” of your mortgage early, the VRM is the better option. The following site has some good examples for comparison: http://mortgagepenalty.ca/category/bank-mortgage-penalties/.
Let the discussions begin!