Variable and fixed rate mortgages

Which should you choose and why?

So, you want to know how fixed and variable rate mortgages work?

Cutting out all the confusing industry jargon, it really boils down to these essentials:

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Fixed rate mortgages

A fixed rate mortgage will keep your payment locked to a single consistent interest rate over the course of your term. A term is usually 5 years long with 5 separate terms taking place over the course of a typical 25 year mortgage.

Learn more about the rules and regulations behind Canadian mortgages here!

This means you never have to worry about your mortgage payment increasing, decreasing, or fluctuating in any way during your mortgage term. People often prefer fixed rate mortgages over variable mortgages for exactly that reason - peace of mind in knowing exactly what your payments will be.

Variable rate mortgages

In contrast to the structured and rarely changing nature of fixed rate mortgages, variable rates change based on the overnight target interest rate set by The Bank of Canada.

Variable rate mortgages typically have a lower interest rate than comparable fixed rate mortgages, however they come with the added risk of change over the course of a term. Variable rate mortgages can be tricky as their payments are calculated in one of two different ways:

  • The first way a variable mortgage payment works is optimal and functions how you figure it would - if your interest rate ends up fluctuating in response to the economy, your payment will be adjusted to match. This will ensure you are always paying the same percentage of principle and interest with each payment - which is good. We at Blink strongly recommend you check that this is how your variable mortgage rate payments will work.
  • The second way a variable mortgage payment can work is effectively evil incarnate. Your payment will be kept the same each month, but the amount you are paying towards interest and principle will instead fluctuate. If interest rates sky rocket you could end up unknowingly making mortgage payments that are going straight to interest, without ever paying down your principle. Please check with your mortgage provider that this is NOT how your variable rate mortgage will be set up. Banks typically utilize this approach more often than broker-only lenders, but always ask your mortgage provider the implications

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Which option should you choose?

If you are more concerned with making consistent payments throughout your term and don't mind paying a slight premium for the right to do so we recommend proceeding with a fixed term loan. If you are the type of person who likes to take risks and believes that rates will stay consistent or drop in the near future, perhaps variable rate mortgages are the best option available!

Another major factor to consider with regards to your mortgage is how much of a down payment to make. Don't worry, we've got you covered with an informative down payment blog here!

If you're not sure if a fixed or variable rate mortgage is right for you, don't worry - we have your back. At Blink Mortgage we evaluate your application, determine the best lenders for your situation, and send you multiple offers so you are certain your mortgage is the absolute best match for you.

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