Difference between Fixed and Variable mortgage rates

The interest rate on fixed rate mortgages is "fixed", they are locked in and they cannot go up or down during the mortgage term.

On the other hand, the interest rate on the variable rate mortgage is "variable", they are NOT locked in and they CAN go up or down during the term.

Fixed mortgage rates gives a peace of mind to home owners that whatever happens to the economy, their interest rate will not go up. It also means that if interest rate goes down, they won't be able to take benefit of low rates.

Variable rate mortgages are for risk takers who want to take benefit of low interest rate. This comes up with an uncertainty because rates can go up any time.

There is another difference between a fixed and a variable mortgage. Fixed rate mortgages can be closed and if they are closed, that means they are LOCKED IN, which means if you want to pay them off or switch out, you will have to break the term and pay the penalty.

Variable rate mortgages can variable closed as well but any variable closed mortgage can be paid off anytime, or can be switched to a different mortgage anytime with just 3 months of interest as a penalty.

Fixed rate mortgages are right fit for you if:

i.  You don't want to deal with interest rate fluctuations. That means you just need to get a mortgage, know how much exactly it is going to cost and pay it off.

ii.  If you are certain about how long you are going to keep the property, then you are probably better off locking in your mortgage at a fixed rate because you don't need to think about penalties or transfer charges

If you want to save money and rates are lower, variable could be a good choice for you. Variable rate can always be switched to fixed mortgages. It is important to understand that mortgage rates Canada fluctuate all the time, please make sure you know the rates before making a decision on what mortgage term to choose.

Also, if you are planning to switch properties, break the term or simply pay off and sale the house, you should think about the "penalties" or "pre-payment" charges. If you are in variable term, chances are your penalties will be less than if you were in a fixed rate mortgage.


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