Interest Rate Options

In terms of interest rates there are 3 options for institutional closed mortgages (even though everyone thinks there is 2)…..

Fixed Rate & Fixed Payment

This is where the interest rate changes by the Bank of Canada will not impact you
You payment will remain the same (typically 1-5 years)
Historically this mortgage type has cost Canadians more in interest than the other options
This mortgage can have high penalties depending on the lender, term, what rates are doing and their IRD calculations

Variable Rate & Fixed payment (true variable mortgage)

The payment on your mortgage is set fixed but the amount of principle and interest inside your payment will change if there are interest rate changes by the Bank of Canada
This gives you the comfort of the fixed payment but the lower penalties & rate benefits of a variable
Note: should interest rates rise significantly that there is not enough money in side your payment to pay the interest to the lender then you may need to increase your mortgage payment or push out your amortization to resolve this
Ability to lock in to a fixed rate at any time during your term with no penalties
Lowest penalty mortgage should you need to break (3 months interest)

Variable rate & Variable payment (adjustable mortgage)

The payment you make on your mortgage will fluctuate with the Bank of Canada rate changes
Typically lower interest rates than fixed historically over 5 year terms
Lowest penalty to break your mortgage (3 months interest)
Ability to lock in to a fixed rate at any time during your term with no penalties

So what do you pick today?

Honestly, if you are considering a fixed rate & fixed payment mortgage then it would be wise to take either a variable or an adjustable mortgage and then after closing day set your payments higher like you had the fixed rate. So if the fixed rate mortgage would cost you an extra $260/month then have your lender automatically increase your monthly payments by that amount. This will have more of your hard earned money going to principal than interest and give you comfort in knowing that if rates increase and you have to pay an extra $38/month well you are already doing that and will not feel it. If applying this strategy it really does not matter if it is an adjustable or variable rate mortgage….We just want to know that we can set payments higher and that we can adjust if necessary.

But see how the numbers matter? Make sure you are reaching out to us so that we can calculate the difference in payments for you to properly advise what the best strategy is for you for your next mortgage in this crazy environment. We are here to help & advice is free!