Difference Between Fixed and Variable Rate Mortgages - Private Mortgages Canada

Difference Between Fixed and Variable Rate Mortgages

Quick Summery

Before taking out a loan, it is important to assess your financial circumstances and understand how each loan works. By doing so, it will help you to decide and choose the perfect mortgage option that suits your budget.

In this blog, we will explain how a fixed rate and variable rate mortgage differentiates; we will also explain the how they work. 

Fixed-rate mortgage explained

A fixed-rate mortgage is a type of loan which is basically how it appears to be. Your monthly interest rate doesn’t change until the loan’s term-end. It is for the people who don’t want to take a risk especially when the market rates rise.

In the event that the market rate rises, people who made to choose the fixed-rate mortgage have peace of mind because their monthly interest rate will not be affected by fluctuations in the market. However, a fixed-rate mortgage is more likely to have a higher interest rate rather than the other mortgage options.

A fixed-rate is a common term that can apply to different types of loans with a variety of needs, such as mortgages, student loans, auto loans, and unsecured personal loans, etc.

This option will allow consumers to budget their money because they know exactly how much they need to pay each month.

Variable-rate mortgage explained

A variable rate mortgage is a type of loan that the interest rate adjusts in response to what the market is doing. This type of loan suits people who are likely to take the risk and believe that the market rate will drop down in the future, which means that their interest rate will decrease if the market goes down.

A variable rate mortgage generally tends to have a lower starting interest rate than a fixed-rate mortgage, partly because they are a riskier choice for the consumer. However, the rising interest rate will increase the cost of borrowing and could hurt the consumer’s financial situation. The consumer who tends to choose the variable rate should be aware of the potential elevated loan cost.

Some fixed-rate consumer loans are also available with a variable rate, including mortgages, student loans, and personal loans. Auto loans are usually available in a fixed rate option.  However, there are few lenders that offer variable rates for auto loans.

Which is better? A fixed-rate or variable-rate?

The best option will depend on your financial circumstances. If you are a risk-taker who can afford to go with the market ups and downs; you plan to pay your mortgage off quickly, then the variable rate mortgage is the best option for you.

On the other hand, if you want to play it safe, want a standardized monthly payment, and don’t want to be affected by the market changes, a fixed rate mortgage is right for you. However, if you decide to pay off your mortgage early, your lender is likely to charge you break costs, which could amount to a thousand dollars.

Break cost fixed-rate mortgage

A break cost happens when the borrower “breaks” the fixed-rate term before its completion. Break cost fees are charged by lenders if the borrowers make an extra payment above their maximum allowed amount, or pay off in full.

A break cost is being calculated by the fixed-rate interest remaining (that is supposed to be paid under the terms) minus the market interest rate that would be gained by putting the loan back to the market.

Could I get a mortgage with bad credit?

The answer is yes, there are certain loan programs and with the help of lenders; you can get a mortgage loan with bad credit. However, expect to pay a little higher interest rates and you may also be required to prepare for a larger down payment.

There are mortgage lenders that accept bad credit, and a mortgages program that is designed for people with bad credit. These are known as adverse credit mortgage or bad credit mortgages.

Final Thoughts

By getting the right mortgage plan, it will help you to budget your money and save a hundred or even a thousand dollars. If you choose the right plan that suits your financial situation. It doesn’t hurt or cost any money to do some research and know what you can afford. It is your responsibility as a borrower to do so. Get what you can afford, and enjoy your life without hurting your own finances.

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