Does it make more sense to go with a fixed rate mortgage or variable mortgage? In this video we discuss the differences of these 2 mortgage products and some of the pros and cons to each. Check it out and if you have any questions please reach out to Jewels or myself. Thanks for watching!
BRENDAN – Hi it’s Brendan at RE/MAX Kelowna here and I’m joined by Jewels Ferris, mortgage broker at Canadian Mortgage Experts. So when people are going through the process of getting their mortgage, they have the option to go with a fixed rate mortgage or a variable rate mortgage, so just wondering if you can maybe walk us through some of the differences between the two products.
JEWELS – Yeah so in a fixed rate mortgage, the rate is fixed, so if you choose a five year term, your rate and your payment will not change for the full five years. A variable rate mortgage can fluctuate, so it’s based on the Bank of Canada prime rate. You’re guaranteed your increment. So ultimately, it’s going to be Bank of Canada prime minus, let’s say, 1%. You’re guaranteed the 1%, that won’t change for five years, but what can change is the Bank of Canada prime, of course. So your interest rate and payment can go up or down throughout that five year period.
BRENDAN – Okay, so then how do you, as a mortgage broker, advise clients as to which way makes the most sense for that particular client?
JEWELS – Yeah, so I think the biggest thing, and the first place that I always start with clients is their personal risk tolerance. So if I have a client, where their budget is not going to support an increase in payment or they have just no risk whatsoever, they’re going to lose sleep over one interest rate increase, then a variable rate is not the right product for them, and I suggest they go into a fixed rate. It’s still a really low interest rate and they’re gonna do well. If they have, you know, a little bit of risk tolerance, and they’re comfortable with the fact that rates can change slightly, I think that variable’s a great way to go, especially right now, as long as the spread is enough between the fixed and the variable, it’s a great program.
BRENDAN – So the variable is typically a little bit lower than the fixed, is that right?
JEWELS – It is, usually, and right now especially. There is quite a difference between a fixed and a variable and the variable is lower.
BRENDAN – Yeah so if you look over, you know, the last five or 10 or 20 years, does one tend to out-perform the other, like rolling the dice on a variable rate mortgage, does it usually come out ahead or not so good or I guess it kind of depends?
JEWELS – Yeah, so historically, variable rates have out-performed fixed, and that’s based on a calculation of penalties that they would pay as well as interest savings. So variables have performed better than fixed have.
BRENDAN – Okay, and then, so if somebody startS off with one, are they able to switch to the other part way through, or once you make that decision, you’re locked into that?
JEWELS – Yeah, good question, so you’re never locked into a variable rate mortgage. If you take it and decide down the road that you’re really concerned with where rates are going and wanna lock in, you can always lock into a fixed rate at any time without penalty.
BRENDAN – So then are you able to go from a fixed rate over to a variable partway through your term?
JEWELS – You’re not, once you’re in a fixed rate, that’s where you are and that cannot be changed. So variable rate does offer more flexibility where you can either stay with the variable or convert to fixed.
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