Let’s circle back on this classic question when choosing a Mortgage product …
Should I go with a fixed or variable rate Mortgage?
Let’s provide some structure to this post with a trusty list:
When helping clients in this decision, I ensure there is fundamental understanding of how a variable rate Mortgage fluctuates, and why. Let’s unpackage some of these fundamentals:
Choosing a variable or fixed rate Mortgage is not good, bad, right or wrong. The choice is yours. I help facilitate understanding, ask you questions, and am a part of this conversation. I want my clients to have a stake in the outcome of their decision. I’m not here to judge people’s decisions. You get it.
Should you go with a fixed or variable rate Mortgage? It depends. This is likely the most irritating answer to provide you, so let me explain …
I like my clients to understand some basic concepts:
These are some examples that I hope you can see when asked, should I go fixed or variable, the answer depends on you!
9 times out of 10 clients will initially want a fixed rate Mortgage. And that means at either a conscious or subconscious level, those clients are OK with paying the premium for the security of a fixed interest rate. In some cases, as outlined above, a client’s mind can change to wanting a variable rate Mortgage. If this change occurs, a hybrid approach might be an additional thought to consider!
The hybrid approach is this …choosing to arrange a variable rate Mortgage with the lender, but setting the clients Mortgage payment as if they were in a fixed rate Mortgage. Simple eh?
All dollars above the minimum required variable rate Mortgage payment go directly toward the principal balance of the Mortgage (re: accelerated Mortgage payoff). If the Bank of Canada does hike the national interest rate, the variable rate Mortgage payment would change. In many cases, the payment that was set artificially higher would not change. The amount going toward principal and interest would change, but not the higher payment that was set. Eventually, if the Bank of Canada continued to hike rates, the Mortgage payment would change.
For example, say a clients fixed rate Mortgage payment is $1,000/mo. If the client chooses a variable rate Mortgage, the required payment, at current interest rate levels is $935/mo. The client could arrange a variable rate Mortgage and pay $935/mo but set their payment to be $1,000/mo. This extra $65/mo goes toward the principal balance of the Mortgage. If the Bank of Canada hikes interest rates, and the variable rate Mortgage payment increases to $960/mo the clients $1,000/mo payment does not change. The amount going to principal and interest would change. Go it?
Client: “Should I go with a fixed or variable rate Mortgage?“
Chad: “It depends”.
Client thoughts: such a cop-out answer :-).
I hope reading above is helpful in understanding some different thoughts when choosing a fixed or variable rate Mortgage.
First, understand myself as a person. Honestly, can I handle the thought of interest rates potentially rising? For some, the conversation ends right there. Great!!
Second, if I am considering a variable rate Mortgage then we continue down the garden path of this conversation which is not linear.
I hope this is helpful for you! If so, let me know. Questions? Comment below. Share this content with others who are considering a fixed or variable rate Mortgage. And finally, thank you in advance for referring your people to my service.
Talk soon,
Chad Moore
P.S
I cannot believe how often spell check picked up my butchering of the word variable. Wow!
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