Deciding between fixed, variable, or adjustable rate types depends on factors such as payment stability, minimizing interest costs, and comfort with payment fluctuations. While fixed rates are directly influenced by Government of Canada bond yields, variable and adjustable rates are directly influenced by the Bank of Canada policy interest rate.

As of June 5th, the Canadian Prime rate stands at 6.95% (across most Canadian financial institutions).

Key Insights:

Fixed-Rate Mortgage:

The interest rate remains fixed for the entire term, ensuring consistent payments.

Pros:

  • Ideal for stability and protection against market fluctuations.
  • Can be cost-effective if secured during a period of low-interest rates.
  • Allows you to budget and plan more effectively, as the payment will not change during the term.

Cons:

  • Penalties for breaking a fixed-rate mortgage may be higher.
  • If market interest rates decrease during the term, borrowers won’t benefit from lower rates without refinancing.
  • If market rates remain stable or decrease after obtaining a fixed-rate mortgage, borrowers may pay more in interest over time compared to variable/adjustable-rate options.

Good to know:

  • The 5-year fixed product is the most popular term in Canada.
  • Suitable for those planning to own their home for an extended period.
  • May involve higher costs if refinancing is pursued before maturity to take advantage of a lower rate.

Variable-Rate Mortgage (VRM):

Your interest rate adjusts in response to changes in the lender prime rate. Despite fluctuations in interest rates, your mortgage payment typically remains constant.

Pros:

  • VRM allows for a fixed payment, enabling increased principal payments when rates decrease.
  • Initial interest rates for VRMs may be lower than fixed-rate mortgages, resulting in lower monthly payments.
  • In a decreasing interest rate environment, borrowers pay less interest compared to fixed-rate counterparts over the loan term.
  • Penalties for breaking a VRM are typically three months’ interest, avoiding the costlier interest rate differential (IRD) penalty associated with fixed-rate mortgages.

Cons:

  • With increasing VRM interest rates, a greater portion of your mortgage payment goes toward interest, extending your remaining amortization.
  • If interest rates rise significantly, some lenders may require you to convert to a fixed rate term to prevent your amortization from increasing any further. This would likely result in an increase to your mortgage payment.
  • Significant interest rate hikes may prompt some lenders to require a conversion to a fixed-rate term to avoid further extension of your amortization, likely resulting in a higher mortgage payment.

Good to know:

  • VRM allows adjustments until reaching the Trigger Point balance.
  • Adjustments may involve converting to a fixed-rate term, adjusting your mortgage payment, or making a prepayment to your outstanding mortgage balance.
  • (Recommended) Increase your mortgage payment when rates rise to prevent an increase in amortization.
  • (Recommended) Consider increasing your regular payment or utilizing prepayment privileges to serve as a buffer against potential future rate increases and prevent further extension of your amortization.

Adjustable-Rate Mortgage (ARM):

Your rate and payment change in tandem with the lender prime rate. Unlike a variable rate, your mortgage payment will fluctuate as the lender prime rate changes.

Pros:

  • ARMs may offer lower initial interest rates compared to fixed-rate mortgages, resulting in reduced monthly payments.
  • Borrowers can benefit from a decrease in interest rates if market conditions allow, leading to lower monthly payments.
  • Penalties for breaking ARMs are typically three months’ interest, unlike the costlier interest rate differential (IRD) penalty associated with fixed-rate mortgages.

Cons:

  • Monthly payments may increase if the lender’s prime rate rises, introducing uncertainty in budgeting.
  • In the event of a significant rise in interest rates, borrowers might end up paying more in interest over the loan term compared to fixed-rate mortgages.

Good to know:

  • Interest rates and payments fluctuate based on changes in the lender’s prime rate.
  • Mortgage payments decrease when rates fall, while the amortization remains the same.

 

The choice between Fixed, Variable, or Adjustable rates depends on your comfort, budget, and unique circumstances. Choose a fixed-rate or VRM for certainty and consistent payments. Opt for an ARM if you’re aggressive in minimizing interest payments. Most lenders offer either VRM or ARM, not both. Have a candid discussion with me to understand the risks and rewards of each type. If your mortgage is maturing soon, reach out for personalized assistance in determining the best rate for you.


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