Mortgages
Fixed vs Variable Rate Mortgages in Canada
When choosing between a fixed or variable rate mortgage in Canada, it's important to consider your personal financial goals and tolerance for risk.
Fixed Rate Mortgage: A fixed rate mortgage is a mortgage where the interest rate is locked in for a set period of time, usually between one to ten years, depending on the term you choose. Your monthly payments will remain the same during the term of the mortgage, which can help you budget and plan for the future. However, the interest rate on a fixed rate mortgage may be slightly higher than a variable rate mortgage.
Variable Rate Mortgage: A variable rate mortgage is a mortgage where the interest rate can change over time, depending on market conditions. The interest rate is typically based on the prime lending rate set by the Bank of Canada, plus or minus a certain percentage. If the prime rate goes up, your mortgage payment will also go up. If the prime rate goes down, your mortgage payment will decrease. Variable rate mortgages typically have lower interest rates than fixed rate mortgages.
When deciding between a fixed or variable rate mortgage, you should consider the following factors:
- Interest rate forecast: If interest rates are expected to rise, a fixed rate mortgage may be a better choice, as it will protect you from higher mortgage payments. Conversely, if interest rates are expected to fall, a variable rate mortgage may be more advantageous, as your mortgage payments will decrease.
- Budget and financial goals: If you have a tight budget and prefer predictable payments, a fixed rate mortgage may be a better option. If you have more flexibility in your budget and are comfortable with some risk, a variable rate mortgage may be a good choice.
- Your tolerance for risk: If you're risk-averse and want to minimize the risk of interest rate fluctuations, a fixed rate mortgage may be the way to go. If you're comfortable with some uncertainty and can handle potential fluctuations in your mortgage payments, a variable rate mortgage may be the right choice.
Open vs Closed Mortgages in Canada
An open mortgage is a mortgage loan that allows you to pay off some or all of the outstanding balance at any time without any prepayment penalties. This type of mortgage provides flexibility for those who expect to receive a large sum of money in the near future, such as an inheritance or a bonus, and want to use it to pay down their mortgage.
A closed mortgage, on the other hand, is a mortgage loan that restricts prepayments during the term of the mortgage. With a closed mortgage, you can still make prepayments, but you may face penalties or fees for doing so, and the amount of prepayments you can make may be limited.
Closed mortgages are the most common type of mortgage in Canada. They typically have lower interest rates than open mortgages because they offer less flexibility and the lender assumes less risk.
When deciding between an open or closed mortgage in Canada, it's important to consider your individual financial situation and goals. If you expect to make prepayments on your mortgage, or you plan to pay off your mortgage early, an open mortgage might be a better choice. If you want a lower interest rate and don't expect to make any large prepayments, a closed mortgage might be a better option. It's important to speak with a licensed mortgage professional who can help you evaluate your options and choose the best mortgage for your needs.