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Fixed Rate Mortgage or Variable Rate Mortgage?

December 27, 2011

 Investors are unable to declare the superiority of Fixed or Variable Mortgage Rate. A Variable Mortgage Rate signifies, initially a Lower Payment but substantial payments in the years to come. On the other hand, Fixed Mortgage Rate involves high level of betting because both of the parties are anticipating interest rate fluctuations in the near future. That’s the reason why the Fixed Rate is always higher than Variable Rate. The major decision a first time homeowner has to make is his/her stay in the house. For Instance, if they plan to live 30 Years then its better to choose shorter Time period of Mortgage. But if they plan to live for 3 or 5 years then its better to utilize 30 Year Fixed Mortgage Rate.

Fixed Mortgage Rate Vs Variable Mortgage Rate

The very first decision every Home Buyer must make is to choose between Fixed and Variable Mortgage Rate. No matter the prime lending rate set by Bank of Canada moves in upward or downward direction, Fixed Mortgage Rate will stay constant and payment per month will be the same for mortgage length. On the other hand, Variable Mortgage Rate moves according to the movement in the Prime Lending Rate set by Bank of Canada. Although the Prime Lending Rate moves upward and downward over mortgage length, the relation between Mortgage Rate and Prime Rate will not fluctuate over Mortgage length.

The main advantage of Fixed Mortgage Rate is that one can manage his budgets properly because monthly payments are stable, constant, and don’t fluctuate with the movements in Market Interest Rate. But if there is significant difference between Fixed and Variable Mortgage Rate, then it isn’t worth paying fixed premium over a mortgage’s length. Mathematically, Variable Mortgage Rate has demonstrated to be less costly over Mortgage Length. But if Prime Rate increases significantly, the monthly payment will also increase and ultimately managing financial burden may be a problem for the Home Buyer. So, we can say that higher rate of Mortgage in Fixed Mortgages is mainly the insurance of Interest Rate. This cost is ultimately paid by the Home Buyer. On the other hand, Variable Mortgage Rate isn’t insured. That’s why, the Homebuyer suffers extra monthly payments when Prime Rate rises and vice versa.



Facts and Figures

66% of Home Buyers chose Fixed Mortgage Rate whereas 29% of Home Buyers are using Variable Mortgage Rate. So, we can see the Fixed Mortgage Rate is preferred by most people and is the most common method of buying a home on mortgage in Canada. The second significant portion of Home Buyers used Variable Mortgage Rate. Another study shows that Fixed Mortgage Rate is more popular among Young People than in Old People, whereas Variable Mortgage Rate is more common in Old People than in Young People. The Chart given below displays the popularity of various kinds of Mortgages Rates among people of different ages.

Mortgage Type

Age group

18-34

35-54

55+

All ages

Fixed rate mortgage

69%

64%

67%

66%

Variable or adjusted rate mortgage

27%

32%

30%

29%

Combination

4%

4%

3%

4%



Following Chart displays Popularity of various kinds of Fixed Mortgages among people of different ages.

Term Length

Age group

18-34

35-54

55+

All ages

1 year term

5%

7%

6%

6%

2-4 year term

27%

18%

12%

20%

5 year term

66%

65%

69%

66%

6-10 year term

3%

9%

10%

7%

>10 year term

0

0

2%

1%


Source: The above presented chart is derived from Annual State of Residential Mortgage Market in Canada for the Calendar Year 2010 presented By Canadian Association of Accredited Mortgage Professionals (CAAMP).

Advantages and Disadvantages of Fixed and Variable Mortgage Rate

Interest rate is the main factor under consideration when choosing between Fixed and Variable Mortgage Rate. Fixed Rate of Mortgage is ideal when interest rate is expected to rise significantly in the near future. On the other hand, if interest rate isn’t expected to rise and there is a possibility that it may fall further then Variable Mortgage Rate is advised by Investors. Interest Rate at its bottom is ideal for Fixed Mortgage Rate because the Homebuyer can enjoy the same low rate for a continuous period of time in the near future but if the Fixed Rate of Mortgage is significantly higher than Variable Rate of Mortgage, then it is advised that Variable Rate of Mortgage is preferable.
Conversely, if you are about to make an Investing Decision and the Interest Rates are at its peak then it is highly advised to choose Variable Mortgage Rate because the homebuyer will be able to reap the benefits of lower interest rate when interest falls. Generally speaking, Fixed Rate Mortgage has a tendency to follow Canadian Bond Yields whereas Bond Yield is compelled by Economic Indicators including Unemployment, Inflation etc. Although Variable Rate of Mortgage is also compelled by above mentioned economic factors but it moves according to the direction of Prime Lending Rate. The Prime Rate is the ultimate factor which portrays current economic condition in the country. So, we can say that when inflation is high then Prime Rate is also high and vice versa.

Conclusion

A Fixed Rate means nonflexible, Predefined Monthly Payments over the length of Mortgage, whereas a Variable Rate is flexible, Prime Rate Dependent Mortgage Rate which can not move in either direction subject to the direction of Prime Rate of Canada. In order to obtain a Fixed Mortgage Rate, the homebuyer must meet the criteria set by the governing body of that particular financial institution. This is so because Financial Institutions don’t want to lend money to borrowers which aren’t having worth and are risk to their investment.  In short, both of these kinds of Mortgages have their merits and demerits. It is mainly up to the borrower which one he choose. The decision basically relies on Current Interest Rate, Prime Rate, Economic Condition in the Country, and nevertheless, borrower’s personal liking. The Average Prime Rate in Canada is 4.21% whereas Average Mortgage Rate for 5 Year Borrowing is 6.33%.

Current Mortgage Rates

Mortgage Term Rate  
1 year2.89%
2 year2.19%
3 year2.19%
4 year2.79%
5 year2.44%
7 year3.79%
10 year4.39%
ARM2.10%

View All Rates & Conditions

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