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Fixed vs Variable rates in 2021 – what is the right decision for you?

Interest rates have been changing rapidly during the COVID-19 crisis. With both fixed and variable rates near records lows, which rate is the best for the consumer?

 

There is no real correct answer to this question. It is important to choose the mortgage solution that suits your needs as a home buyer. Many factors should be considered including:

  • - Future plans for the home including renovations or buying / selling
  • - Income consistency & stability
  • - Monthly debt obligations

 

When evaluating the difference between fixed and variable, the “spread” between the two rates should be considered. For example, a 5 year fixed rate with an amortization of 30 years currently comes with a rate of 2.34%. The equivalent term on a variable rate is 1.50%, which represents a 84 Basis Point spread between the two options. When the Bank of Canada begins to raise the Prime Lending rate (which will increase clients with Adjustable/Variable rate mortgages), the increases are generally in 25 Basis Point increments. This means you are “protected” from at least 3 Prime Lending rate increases before the rates meet.  

 

Some of the main differences between fixed and variable rates are listed below:

 

Fixed-rate mortgages:

  • - Interest rate is guaranteed for the duration of the selected term
  • - Holding rates for 120 days are eligible while shopping for a home. 
  • - Predictable payments
  • - Penalties can be high, up to 4% of the mortgage balance in some cases. The penalty calculation is based on “Interest Rate Differential”

 

Variable-rate mortgages (VRMs):

  • - VRMs can change with market conditions that are set out by the Bank of Canada and the Prime Lending Rate. 
  • - Holding a rate for 120 days may not be eligible while shopping for a home. 
  • - Some lenders have “adjustable-rate mortgages”. This means the rate & payment will auto adjust with changes in the prime rate and maintains the original amortization schedule.
  • - A “variable-rate mortgage” means the total payment amount remains the same even with changes to the Prime Rate. Since the payment remains the same, the percentage of principal vs interest will change (which in turn affects the amortization). 
  • - Some lenders will not allow you to “port” a VRM without converting it to a fixed rate term
  • - Penalties to break a VRM are consistent (3 months of equivalent interest). 

 

Speak with an agent at Connolly Capital to help guide you through this important decis

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