18 Feb

Choosing Variable Rate versus a Fixed Rate Mortgage

General

Posted by: Leonore Claypool

This is probably one of the most often asked question. Discounted variable rate mortgages are very attractive. At Prime less .75% for a five year VRM your rate right now would be 2.25%. That is pretty great mortgage rate. Currently, the average five year fixed term mortgage rate is 4.00%.  That’s a pretty big difference. So here are a few things to consider:

Variable rate mortgages are harder to qualify. Due to new federal guidelines a CMHC insured variable rate mortgage must use the current Bank of Canada qualifying rate of 5.44%. If you are tight on income or maximizing the mortgage amount then you will more easily qualify on the five year fixed rate of 4%.

Changes in income? Is your income on an upward swing or downward? Are you going to be bringing in less money per month or more within the next year to five years? A variable rate mortgage can save you money now while Prime is low however can you handle the payments if Prime increases to 5 of 6%? That’s more than doubling the payment. Can you easily make the payment and how would that affect your other financial obligations? And don’t forget your lifestyle. It could drastically change things for you so make sure you review your monthly budget and do a “what would happen if ” scenario.

Also, be careful of variable rate mortgages that keep the payment amount the same even when Prime changes (up or down). One way to get around this is to anticipate a higher interest rate and set the mortgage payment at that amount.  The bonus is that while Prime is low you will be paying down your mortgage faster because the difference is directly applied to the principal.