Fixed vs Variable Mortgages

There is a raging debate regarding fixed vs variable mortgages. Many financial experts and publications like to point out the benefits of one over the other, but that is not the case here. This article is designed to take a neutral look at fixed vs variable mortgages. The goal of this article is to provide unbiased information regarding fixed vs variable mortgages so that readers can make an informed decision regarding which mortgage type will be best for their specific situation.

Fixed mortgage rates are known for providing an environment where borrowers know exactly what they're getting into when it comes time to pay for their home loan interest rate every month, but there are two sides to consider when pondering whether or not homeowners should go with a fixed mortgage over one that's adjustable.

The primary reason many people prefer having a fixed mortgage instead of an adjustable one is because they want predictability in terms of how much their monthly payments will be, and of course, how much interest they will be paying the banking institution over the life of their mortgage.

The average Canadian home loan rate is currently at 2.6%. Most people who go with a fixed mortgage are aware that they're going to be paying that exact rate for the next five, ten or fifteen years.

However, the same people often forget that with a fixed mortgage comes stagnation. In other words, the managing of their finances becomes far less flexible. If it happens that a person's income increases by 20% two years into their fixed mortgage then they'll have to renegotiate with their bank to allow for an increase in the amount of money that is put towards their home loan each period. If you were to go with an adjustable rate mortgage today, your interest rates could increase in the future which would result in higher monthly payments and more money being sent toward principal each month when it's due. The opposite can also happen when adjusting down. That said, if homeowners are able to plan accordingly ahead of time in case their payment does rise in the future by refinancing or finding another mortgage , then this risk may be worth taking.

Fixed vs Variable Mortgages: What Are They?

A fixed interest rate mortgage is a loan that has a set interest rate for the entire term of the loan. A variable interest rate mortgage, on the other hand, has an initial low interest rate but this same low rate can increase over time. Many homeowners choose to go with a fixed interest rate because they want to be protected from potential increases in their monthly payment.

It's important to note that not all fixed and variable mortgages are created equally and it's always smart to understand how these different types of loans work before making any decision about which type of mortgage is best for you. For example, some variable interest rate mortgages also have caps or limits that limit how much your interest can increase or decrease over the course of your mortgage.

Fixed vs Variable Mortgages: Advantages and Disadvantages

Earlier this article mentioned that there are two sides to consider when pondering whether or not homeowners should go with a fixed mortgage over one that's adjustable, but what is the other side? As previously explained, borrowers often want stability with their home loan interest rate. This desire for stability is why many people choose to go with a fixed interest rate mortgage. They enjoy knowing exactly what they're going to pay each month as well as how much money they'll have available after paying their monthly house payment each period.

There are some disadvantages associated with having a fixed rate mortgage, however. One major disadvantage is that if your interest rate is fixed at a high level, then you're going to end up paying more interest over the course of your loan.

Another disadvantage is that if you decide to refinance or sell your home before the completion of the original loan period, then there are usually penalties associated with early redemption of your mortgage. There are also fees associated with refinancing as well as closing costs.

A Variable rate loan can be beneficial because of the leverage you get on your money when the rates are low. This can mean that you can invest in higher yielding assets or afford to buy a more expensive home while only paying off the same amount of principal at each payment period, whether it is an increase or decrease in interest rate.

When market interest rates are more volatile Variable rates will follow suit and there's no way of telling what direction they will go with certainty. There is also other factors such as tax deductible vs non-tax deductible to consider.

Fixed vs Variable Conclusion

Variable is a more risky mortgage but can also bring in more profit if interest rates decrease. Fixed is safer and guaranteed. This is not a debate as much as an explanation. Its is also worth noting that banks don't get kick backs on variable but get huge kickbacks on fixed so you better be aware of what you are doing when picking between the two forms of mortgages.

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Disclaimer: The information contained in this article is intended for informational purposes only and should not be construed as professional advice.