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  • Probably the biggest decision borrowers face is whether to choose a variable or fixed rate mortgage. It’s a difficult choice to make and even experts remain divided on which type is best given today’s low interest rate environment. Much of the decision rests on borrowers’ own unique financial profile and the amount of interest rate risk they are comfortable taking on.

    A fixed rate mortgage offers an interest rate that does not change over the length of your mortgage term. This type of mortgage can offer a certain level of comfort and security: you’ll know exactly what your payments will be each month for the entire duration of your mortgage term.

    A variable rate mortgage changes over the duration of your mortgage term based on the lender’s prime rate. Here is an example: if a bank is advertising a rate of prime -0.1% and the prime rate is 3%, your interest rate would be 2.9% at the start of your mortgage term.  With a variable rate mortgage your interest rates increase and decrease as the prime rate of the mortgage lender goes up and down. In this way variable mortgages are often referred to as ‘floating’ because they rise and fall throughout the length of the term based on the economic conditions at the time.

    The prime rate is the benchmark interest rate used by banks and lenders when offering short term loans.  Prime is directly influenced by the Bank of Canada’s overnight lending rate and can change on a monthly basis. Changes in both the BoC’s overnight lending rate and the prime lending rate are determined by a host of economic factors including GDP growth, inflation, credit market conditions and the unemployment rate.

    Over the last 25 years, Canadians in variable rate mortgages have usually paid less interest than those who took a fixed rate. While variable rate mortgages can potentially save you money over time, you need to be prepared both financially and psychologically for your mortgage payments to rise during your mortgage term. If the prospect of paying an extra $200 per month on your mortgage keeps you up at night, variable rates may not be the right choice for you.