What are some of the primary differences between fixed- and variable-rate mortgages?
Historically, homeowners have fared better with variable-rate products, from an interest rate perspective, compared to a five-year fixed-rate term. However, variable rate mortgages aren’t right for everyone, and while even experts can’t predict future interest rates, fixed rates have rarely been lower than they are today.
Fixed-rate mortgages also fit a wider range of budgets because the rate remains the same throughout the entire term of the mortgage, which provides borrowers with assurance that their payment will remain constant. They know exactly how much they’ll pay every month and how much of the mortgage will be paid down at the end of the term.
With a variable-rate mortgage, the interest rate fluctuates with the prime rate throughout the mortgage term. With some variable-rate products, payments remain the same throughout the term but the amount going toward principal and interest varies depending on the current rate. With others, the amount of the payment you make each month may change.
Are there differences in the way lenders are qualified for variable- and fixed-rate mortgages?
Generally speaking the criteria for qualification are the same, but there is one difference.
For a five-year fixed-rate mortgage the rate used to determine affordability is the rate on your mortgage. For all variable-rate mortgages and fixed-rate mortgages with terms of less than five years, the qualifying rate used is set by the Bank of Canada. Called the Mortgage Qualifying Rate or MQR in the industry, it’s intended to mirror the five-year fixed posted rate the banks offer to ensure that payments are affordable even if interest rates increase.
What types of homebuyers tend to benefit most from the certainty of a fixed-rate mortgage?
Many first-time homebuyers prefer a fixed-rate mortgage, as they’re often working within a set budget and there are a lot of unknowns in terms of the expenses that come with owning a home as well as their future income potential. When there is not a lot of flexibility in the budget, they may take comfort in having the certainty of a set payment amount for the duration of the mortgage term.
In a poll CIBC released recently, 56 per cent of Canadians aged 25 to 34 said they would select a fixed-rate mortgage today, indicating that the majority of younger Canadians who are in the market for a mortgage would choose a fixed-rate product.
Choosing the mortgage that is right for your personal circumstances also depends on your overall financial picture. For example, if you don’t have much in the way of financial assets outside of your down payment or your home, knowing that your rate is fixed is an important consideration. Also, if you have other variable-rate debt, such as credit cards or unsecured lines of credit, mortgage rate stability can be an important component of your financial plan.
Conversely, what type of homebuyer tends to benefit most from a variable-rate mortgage?
Variable rate mortgages are generally more appealing to those who have more flexibility in their budget. If you have extra income and room in your budget, you’re more likely to be comfortable with fluctuating interest rates. Clients with little or no other debts who have built up other financial assets outside of their home are more likely to be comfortable with a degree of rate uncertainty.
Those who fare best with variable-rate mortgage are also emotionally at ease with the idea that their interest rate may change over time.
Is there a way that home-buyers can “try on” the risks and benefits of both types of mortgages?
Certainly. At www.cibc.com/mortgages, we provide a mortgage comparison tool as well as many other useful mortgage and home-buying calculators.
For a more detailed and personal analysis, however, we encourage anyone who is thinking about buying a home or is within six months of a mortgage renewal date to meet with one of our mobile mortgage advisors.
A mortgage is a major financial decision that should not be made in isolation. It is an important component of an overall financial plan. Our mobile mortgage advisors will meet with you at a location and time that is most convenient for you, and will help you ensure that the mortgage you choose meets your unique individual needs.
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