Jason Peatz – Mortgage Associate

Fixed or Variable Interest Rates… What’s the Difference?

May 14, 2009 1:50 pm Jason First Time Home Buyer, Interest Rates

You’ve found your home, a Mortgage Broker has helped you through the process and now you’re ready to commit.  But what are your options?  One of the first choices to make regarding your mortgage is “Fixed” or “Variable” interest rate.

The Fixed Interest Rate mortgage defines the interest rate for the entire term of the mortgage from the outset.  This means you will know exactly what your mortgage payment will be for the entire term of your mortgage (1, 2, 3, 4, 5 or 10 years).  For some people, this is important as it allows them to set up their monthly budget with certainty.

The Variable Interest Rate mortgage defines its interest rate in relation to the lender’s prime lending rate.  This means your payments can change along with the bank’s prime lending rate (often called “at prime”).  The prime lending rate for all lenders fluctuates: one month your payment may be $1000 but the next month $1025 if prime went up by 0.25%.  The prime lending rate may also go down which would mean your payment would drop.

The following five questions are some of the key questions you should ask yourself and your Mortgage Broker to determine what is the best choice for you and your situation.

• Is saving as much money as possible each month important to you?
• Is knowing the amount of your bills every month important to you?
• Where do experts see interest rates going in the next 12 months?
• What are the differences in payments between the two options and how does that fit into your budget?
• What are your options further down the road if you are unsatisfied or if your situation changes?

Once you have your answers to these questions, take the time to consider them.

With its uncertainty, what is the advantage of the Variable Interest Rate Mortgage?  The advantage is that historically the variable rate is lower than the fixed rate and could save you money over the entire term of the mortgage if you can handle the potential fluctuations in payments.  One important thing to note is that with the Variable Interest Rate Mortgage you can fix your interest rate at any time to the best Fixed Rate Mortgage available through that lender.  If you don’t like where the prime lending rate is going, you may fix your interest rate at any time.

Ultimately, does the stress of your payments potentially going up justify the cost savings?  If yes, then go for the variable otherwise, the fixed is probably right for you.  Ask your Mortgage Broker to assist you with the details of your situation so you can make the most informed decision possible.