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By Rebecca Hills
Special to the Financial Independence Hub
Fixed rate mortgages are very popular in Canada. In fact, of the 6 million mortgages that have been taken out by Canadians, 60% are fixed rate mortgages. A fixed rate mortgage agreement stipulates that the borrower will be required to pay interest on their mortgage that will not fluctuate for a set period of time. Presently, the most popular mortgage in Canada is a three-year fixed rate mortgage.
In addition, interest rates for fixed mortgages will differ, depending on the province that you are living in, as well as the number of years on the term, and also the financial institution that you borrow from. Different mortgage brokers will also offer different rates, so doing your homework beforehand, while understanding your unique financial goals and situation, will help you avoid any headaches down the line. Here, our goal is to provide you with a beginner’s guide to the fixed rate mortgage scheme.
What is meant by Fixed Rate Mortgage?
As mentioned, roughly two thirds of Canadians opt for a fixed rate mortgage over a variable rate mortgage. A fixed rate mortgage is designed for people who are averse to risk, as having a set interest rate will eliminate the risk of interest rates suddenly skyrocketing in the future. Imagine a situation where interest rates increase exponentially and you are unable to afford the sudden spike in rates. Such a possibility would not be an issue when you lock in an interest rate for the entire term of your loan.
Also, please note that you don’t have to stick with a fixed rate mortgage forever. For instance, if you receive a job promotion or inherit some money then you may be more comfortable taking a risk and switching to a variable rate mortgage. Once your mortgage has reached the end of its term you can consult with your broker in order to determine if switching to a variable rate mortgage may be the better option when it comes time to refinance your home.
Evidently, in some cases a variable rate mortgage may be the better option, if interest rates happen to be low when you sign, and remain relatively low throughout the term of your mortgage. As can be seen, both fixed rate and variable rate mortgages have their pros and cons, so if you are not sure with which to go with speaking to a financial advisor or broker may help with your dilemma.
Should I choose a fixed or variable rate mortgage?
There are many advantages to fixed rate mortgages. For instance, you won’t have to worry about your payments increasing over the duration of the mortgage term. There are also many options to choose from, from 2- or 3-year terms, to 5- or 10-year terms. In some cases you may also have the option to sign a 6-month fixed rate mortgage or one as long as 25 years. There is also the matter of certainty, as you will know exactly what your mortgage will cost at all times. Knowing exactly how much you will be required to pay will also streamline your billing, and also help you create a budget that is safe and secure.
However, there are also some disadvantages. For instance, fixed interest rates tend to be higher than on variable products. As such, it may end up costing you more over the short term as well as possibly the long term if interest rates in Canada remain low during the duration of your fixed rate mortgage term. Also, in the event that you decide to break your term/get out early, then you may have to pay very severe penalties that can cost thousands of dollars.
Advantages of Fixed Rate Mortgages
In sum, there are many reasons to choose a fixed rate mortgage. It is recommended for people who have a very low risk threshold. It also allows for comfortable and secure financial planning and budgeting, as you will know exactly how much you will pay and for how long as well. There are also many term options to choose from, which is ideal for those who want flexibility in their mortgage package, and you can also enjoy peace of mind, knowing that your interest rates will never go up during the term of the mortgage.
Also, if you sign when interest rates are low, then you can save several thousands of dollars over the course of the loan. With trying and uncertain economic times, many Canadians are constantly worried about their financing, and whether or not they can afford to buy the home of their dreams. With a fixed rate mortgage how the economy is doing will not have an impact on interest rates, so you can focus on other more pressing financial or familial matters. Evidently, if you decide to switch to a variable rate mortgage in the future, due to a substantial drop in interest rates in the market, then you can do so, without fear of fees or penalties, at the end of the term.
Rebecca Hills is the community manager at Mortgages Mortgages. She loves to write about the updated financial trends and hence make people aware, how to secure mortgages and loans safely!
