Fixed vs. Variable Rate
The following are some things you will want to consider when evaluating your options between fixed and variable rate mortgage products.
Can you afford to take a variable rate mortgage?
There is some risk associated with a variable rate mortgage; you need to assess your ability to service the mortgage in the event that rates do rise. One of the things you can do to mitigate the risk of rising rates is to fix your payment at a set amount higher than the minimum requirement. For example, setting your payments based on the current five year fixed rate will allow you to provide a buffer in the event that rates rise. Setting your payments higher will also allow you to further take advantage of the lower variable rate by allocating more of your payment to pay down the principal.
Does a variable rate mortgage fit your risk profile?
Once you have decided you can afford a variable rate mortgage the next thing you will want to assess is if a variable rate mortgage fits your personality, lifestyle and comfort zone. If you are the type that can’t sleep at night knowing that your rate may change by .25% then a variable rate mortgage may not be the best option for you. Many studies suggest that from a historical perspective a variable rate is a good bet. Just keep in mind that no one can predict where rates are going to be with any certainty and none of the economists who make the predictions will be making your mortgage payments.
What should I look for when choosing a Variable Rate Mortgage?
- Payment frequency – Make sure you are aware of the options available before deciding. Some lenders may not allow certain variations of payment frequency.
- Conversion to fixed rate – Does the lender allow the mortgage to be converted to a fixed rate mortgage at any time? If so what rate are you guaranteed on conversion? Will you get their best-discounted rate or their posted rates? Remember, if you are in a closed mortgage you will not have any negotiating power.