Why It Might Be a Good Time to Choose a Variable Rate Mortgage
One of the choices you will have to make when you apply for a mortgage is whether you get a fixed rate mortgage or a variable rate. The majority of Canadians choose fixed mortgages because they like the stability of knowing their rate is not going to change – but if you’re willing to handle some fluctuation, now might actually be a great time to choose a variable rate.
Variable rate mortgages can save you money in two ways.
Lower Interest Rates
At the time of writing this, an average variable rate mortgage is going to cost homeowners around 2.4% in interest while a fixed rate mortgage will cost approximately 3.19%. The spread of 0.79% should be enough to offset at least three rate increases from the Bank of Canada. (While it’s possible to have a rate increase of more than 0.25% that would be very rare.)
Cost of Breaking Your Mortgage
The second way that variable rate mortgages can save you money is that they are usually cheaper to break than fixed mortgages. While most people don’t enter a mortgage planning to break it early, the fact is that as many as 20% do. The cost to break a $400,000 mortgage for example, could be between $2500 and $5000.
Reasons for breaking a mortgage before the term ends can include divorce, refinancing or moving if you don’t have a mortgage that is portable.
With a variable mortgage, the cost to break it will be equal to three months’ worth of interest. With a fixed mortgage, the cost to break it will be the greater of three months’ of interest or the interest rate differential (IRD). Depending on the lender, the IRD can be quite high.
Should you choose a variable rate mortgage?
As mentioned, at the present time selecting a variable rate mortgage can save you money both in terms of interest and in the cost of penalties should you choose to break your mortgage early. This can be a good option as long as you’re able to handle some volatility in interest rates.
There is also the option of choosing a variable rate now and locking it into a fixed rate later, but getting the timing right on this can be tricky.
At Matrix Mortgage Global, we help clients decide between a fixed rate mortgage and a variable rate mortgage. Call us today at 1-800-429-0717 to know more.