This is one of the most important choices you will make when you get a mortgage. Yet unless you have a crystal ball, there is no way to know for sure what interest rates will do in the future. Remember: no one can tell you for sure if a fixed or variable rate mortgage is a better deal. But here are some things to consider:
You may prefer a fixed rate if:
- you have no plans to sell your home early on in the mortgage term – or are not worried about possible penalties if you do
- you think interest rates are going to go up soon
- you aren’t comfortable letting your mortgage float with the market. You prefer the peace of mind of knowing your mortgage costs.
You may prefer a variable rate if:
- you may sell your home before the end of the term and are worried about penalties
- you think interest rates are going to stay the same or drop
- you can sleep at night without worrying about rising rates. If rates rise, you have a plan for how you will handle the bigger mortgage payments each month.
Watch a video on mortgage trends and rates.
Good news: Some lenders will also let you switch from a variable to a fixed rate mortgage as interest rates start to rise. So you could start with a variable rate and then change as rates shift upward. This is called “locking in.”
Tip: Once you lock in your mortgage, you may pay a penalty if you try to refinance your mortgage. Penalties often equal about three months interest or the interest rate differential, whichever is greater.
Be warned – the interest rate differential is higher now than in the past, due to the steep drop in interest rates. This can mean a penalty of $10,000 or more !
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.