I often get asked whether the variable rate is better than the fixed rate and vice versa. The answer to this question depends on a person's appetite for risk and whether they can afford a 1-2 percent increase in their interest rate.
Recently, variable mortgage rates have been historically low. Consider RMG Mortgages, offered exclusively through the broker channel, is offering a five-year variable as low as 1 percent.
Variable mortgage rates also come with less risk of forking out huge, unexpected and dreadful prepayment penalties down the road, often seen when breaking fixed-rate mortgages.
When exiting or breaking a variable-rate mortgage contract, the penalty is just three months' worth of interest. On the other hand, breaking mortgage contracts with fixed rates usually amounts to more because of the Interest-Rate-Differential calculation. "An interest rate differential (IRD) weighs the contrast in interest rates between two similar interest-bearing assets. Most often, it is the difference between two interest rates."
Also, consider that you can always lock your variable rate into a fixed rate. It's important to realize, however, that although you may lock into a fixed rate at any time, you will only qualify for what the fixed rates are at the time you lock in and not what they were when you originally signed your mortgage contract. This means their may be a risk of taking on a higher rate in the future.
If you still have questions about taking on a variable rate mortgage vs. choosing a fixed-rate, please do not hesitate to call or write.
Send us an email at firstname.lastname@example.org or call 647-773-4849.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929