VARIABLE VS. FIXED TERM

COMMON MORTGAGE PROGRAMS

Whether you are acquiring, renewing, or refinancing your mortgage, one of the most important decisions you will make as a homeowner is selecting a Mortgage Program that best matches your homeownership goals and your risk tolerance. 

The most popular Mortgage Programs in Canada include the Variable Term Program and the Fixed Term Program.

THE CASE FOR A VARIABLE RATE TERM

Many Canadians shy away from the option of a variable rate mortgage because of the potential risk of rate increases. However, while there is always a risk of interest rate fluctuations, this concern may be less of a factor than you may think,  and there are other reasons to consider a variable rate mortgage.

Many Canadian economic experts believe that a mortgage rate that varies with fluctuations in the bank’s prime rate will offer the greatest advantage when it comes to long-term savings on interest costs. Examining Canadian mortgage rate data from 1950 to 2007, Dr. Moshe Milevsky, Associate Professor of Finance at York University, found:

Choosing a variable rate mortgage would have saved Canadians $20,000 in interest payments over 15 years (based on a $100,000 mortgage); and

> Canadians would have been better off with a variable rate mortgage compared to a five-year fixed rate 89% of the time.

> with select lenders, mortgage payments are set for the term, even though interest rates may fluctuate during that time.

> When rates go down, an increased amount of your payment goes to pay the principal. With more going into your principal, the less interest you pay, and the faster the mortgage is paid off.

> When rates go up, you’ll see an increase in the portion of the payment that goes into paying the interest. With less going into the principal, the amortization period is extended.

> Typically, variable rates include some of the lowest rates available.

> Variable rates offer you the freedom to convert any time to a fixed-rate mortgage with a term that’s at least as long as the one remaining on the mortgage.

Additional benefits include:

1. In the event you choose to early renew or refinance, the pre-payment penalty is limited to 3 month interest. To estimate, use this calculation:

Your current mortgage balance $______ x 0.50% = $______

1. The option to further protect your Mortgage Plan in a rising Prime Rate situation by adding an optional, additional payment each cycle which is 100% applied directly to your principal balance.

2. The option to select an accelerated mortgage payment option, which further protects your Mortgage Plan in a rising Prime Rate situation.

3. The option to convert and lock into a fixed-rate mortgage term.

THE CASE FOR A FIXED RATE TERM

The fixed-rate mortgage term is popular because of the high level of stability it provides. Your interest rate and payment are locked in for the length of the term. This means you’ll have peace of mind knowing exactly how much principal and interest you will be paying regardless of changing economic conditions.

Do you know that a large majority of homeowners will renew or refinance 3.69 years into the current term?