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Fixed or Variable Rate Mortgage – Which One Is Right For You?

What is a fixed rate mortgage?

A fixed rate mortgage is a home loan with a fixed interest rate for the entire term of the loan. This means that the mortgage carries a constant interest rate from the beginning to the end.

Fixed rate mortgages are popular products for consumers who want to know how much they will pay every month.

What is a variable rate mortgage?

A variable rate mortgage will fluctuate with the Prime Rate throughout the mortgage term. While your regular payment will remain constant, your interest rate may change based on market conditions.

This impacts the amount of principle you pay off each month. When rates on variable interest rate mortgages decrease, more of your regular payment is applied to your principle. Additionally, if rates increase, more of your payment will go toward the interest.

Variable rate mortgages typically offer a lower interest rate than fixed rate mortgages.

How are fixed mortgage rates determined?

Chartered banks use the bond market to determine their mortgage rates for a fixed rate mortgage. A mortgage and a Government of Canada bond are two investments that banks use to generate profits. Banks use bonds as security against losses in their mortgage departments.

Banks calculate the interest rates on fixed mortgage rates based on the interest rates they are getting on the money they have invested (bond rates). They use their forecasted earnings from the bond investments to cover the costs and possible losses incurred through a mortgage.

Bond rates are driven by economic factors such as unemployment, export, and inflation. The more lucrative the bond market and the higher the bond rates, the lower your fixed rate mortgage will be.

How are variable mortgage rates determined?

Variable mortgage rates are affected by changes in the Bank Rate and the overnight rate, which are set by the Bank of Canada.

Every bank uses the overnight rate to determine their own prime rate. Since most variable rate mortgages fluctuate with a bank’s prime rate, there is a direct correlation between the overnight rate and the interest rate on variable mortgages.

The Bank of Canada determines the overnight rate (the average interest rate that the Bank wants to see in the marketplace for one-day (overnight) loans between financial institutions). The Prime rate varies with performance of the Canadian economy and inflation forecasts.

The Bank of Canada’s role, as defined in the Bank of Canada Act, is “to promote the economic and financial welfare of Canada”.

What you should know

The Bank of Canada is expected to introduce a number of policy rate hikes in 2022. It’s looking like the gap between fixed and variable mortgage rates will be narrowing.

“Variable-rate mortgage holders will be the most significantly impacted [by interest rate hikes], especially with talk of there being a string of rate increases in 2022,” Grant Bazian, MNP LTD’s president, said.

“Households may need to readjust their budgets to accommodate for hundreds or thousands of dollars more a year in mortgage-related costs.”

How we can help you decide what is right for you

Not sure if a fixed or variable rate mortgage is right for you?

Client First Mortgage Solutions is not tied to any one lender or range of products. We will start by getting to know you and your homeownership goals, make recommendations drawing from available mortgage products that match your needs, and we will decide together on what’s right for you.

Whether you are looking to refinance to take advantage of low rates, renew a current mortgage, purchase a new home or just thinking of buying in the future, contact us today! We can help you.

Original Article – Canadian Mortgage Professionals – March 18, 2022

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