Fixed Rate vs. Variable Rate: A Simple Overview
The decision to choose a fixed vs. a variable rate is not always an easy one. It depends on your tolerance for risk as well as your ability to withstand increases in mortgage payments. You can sometimes expect a financial reward for going with the variable rate, although the precise magnitude will ebb and flow depending on the economic environment.
Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.
A variable rate mortgage often allows the borrower to take advantage of lower rates such as in the current climate — the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage. For example, if the prime mortgage rate is 2.5 percent, the holder of a prime minus 0.5 percent mortgage would pay a 2.00 percent variable interest rate.
As a borrower, the best option is to have an honest discussion with your Your Mortgage Your Way professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.