Planning to apply a mortgage and wondering which mortgage rate type will suit you the best? One of the most important decisions a borrower will make when choosing a mortgage is whether to go with a variable or fixed interest rate. It’s a decision that can have a long-term impact on a homeowner, costing thousands of dollars in interest.
In 2024, as inflation sweeps across the Canadian economy, we will examine whether a fixed or variable rate mortgage in Abbotsford is best suited to your specific situation and risk tolerance. There are various options for interest rates, ranging from the security of a fixed rate mortgage to the flexibility of a variable rate mortgage.
What Are Fixed Rate Mortgages?
A fixed rate mortgage has an interest rate that is fixed for the complete term of the loan. Payments are established in advance for the period, giving you the assurance of knowing exactly how much your payment will be during the duration. Fixed rate mortgages in Abbotsford can be open (payable at any time without incurring breakage fees) or closed (breakage fees apply if paid off before maturity).
What Are Variable Rate Mortgages?
With a variable rate mortgage, mortgage payments are fixed for the duration of the loan, even if interest rates change. If interest rates fall, more of the payment is used to lower the principal; if interest rates rise, more of the payment is used to pay interest. Variable rate mortgages can be open or closed.
Difference Between Fixed & Variable Rates
A fixed-rate mortgage means that your monthly payment and mortgage rate will remain constant during the length of your loan. With a variable-rate mortgage, the mortgage rate fluctuates in accordance with your lender’s prime lending rate. A variable rate is expressed as Prime +/- a specific amount, such as Prime – 0.45%. Though the prime lending rate may fluctuate, the relationship to prime will remain consistent throughout your term.
- Fixed Rate Mortgages
- Locks your rate for a fixed term (often 1, 2, 3, 4, or 5 years).
- A slightly higher rate ensures a constant mortgage payment throughout time.
- If you violate your mortgage, you may face a higher penalty known as the ‘Interest Rate Differential’.
- It’s hard to switch from a fixed to a variable rate without breaking the mortgage.
- Variable Rate Mortgages
- The Central Bank of Canada determines the rate, which fluctuates over time.
- The rate is calculated as a discount from the Prime Rate (ex. Prime minus.50%).
- Variable rates are often lower than fixed rates, but may fluctuate higher during certain periods.
- Breaking the mortgage often results in a lower penalty.
- You can convert the variable rate to a fixed rate at any moment without breaking the mortgage.
Which Is The Most Common Mortgage Rate?
Typically, 60% of our clients choose for a 5-year fixed rate mortgage, while 30% prefer a 5-year variable rate mortgage. The 5-year term length is the most common since banks prefer to compete on it, therefore it frequently represents the best value.
During the pandemic’s rock-bottom rate era, this trend momentarily flipped, favoring variable rate mortgages. The huge disparity between variable and fixed rates pushed many first-time and repeat home buyers to the significantly lower 5-year variable rate.
If you are looking for a reliable mortgage broker in Abbotsford who can help you get approved for a fixed or variable rate mortgage, rely on none other than Sandhu & Sran Mortgages. We have industry experience and know how to find the best rate options based on your unique mortgage situation. For more details, give us a call today.