The Difference between Fixed Rate or Variable Rate Mortgages
What is the difference between Fixed Rate or Variable Rate?
These days, mortgages are very common for home or property loans. People tend to take them more than any other loan. Often it is the largest loan that they will borrow. But what is a mortgage? How many types can we find in this category? Let’s explore that in more detail. And don’t forget, we are always here to help and assist you throughout the entire home buying process. Let's start with understanding more about mortgages. A mortgage is a loan taken out to purchase a property. It is secured against the actual property, so if the borrower fails to repay the loan, the lender has the right to fore close and repossess the property. Mortgages are typically for large sums of money over long periods, usually up to 25 years or maybe 30 sometimes. Now, time to learn about the categories of the mortgage in further details.
Kinds Of Mortgage
Mortgages come in various types to suit the needs of different borrowers. Here are the 2 most common and preferred types of mortgages: “The Fixed Rate Mortgage” and “The Adjustable Rate Mortgage (commonly referred to as Variable Rate Mortgage).” Confusing? Our Mortgage Brokers in Red Deer can help you decide which one you should choose and why it is the best option.
Let’s discuss them in more detail.
A fixed-rate mortgage is a loan in which the interest rate is set for the term of the loan, meaning it will not change. This type of mortgage is desirable for many borrowers because it provides stability and predictability. Payments remain the same throughout the loan term, making budgeting easier. At renewal, the rate is then renegotiated between the lender and the borrower.
Variable Rate Mortgage:
A Variable rate mortgage is a loan in which the interest rate can change periodically, usually in response to changes in the Bank of Canada prime rate. The rate is often prescribed as “prime plus a percentage”. As an example, you may start off the term of the loan at Prime + 2.00%. If Prime is 3%, then your rate would be 5% (3 + 2). This type of mortgage is attractive to certain borrowers, as the initial rate is often lower than a fixed-rate mortgage. But Variable Rate mortgages can be risky and volatile, as the changes in Prime rate can go up, resulting in higher payments. Hence this kind of mortgage rate should be for persons who can afford any changes in their rate and monthly payments.
Differences Between Fixed-Rate Mortgage and Variable Rate Mortgage
Now, to understand these two types in more detail, here are the differences you can refer to when deciding on your preference. Apart from their basic nature, several points are very significant.
These are as follows:
Interest Rate: While examining the side of fixed-rate mortgage’s interest, it is noted that the interest rate remains the same throughout the life of the loan. Whereas with a Variable-rate mortgage, the interest rate can change periodically.
Payments: On the fixed-rate mortgage part, the payments remain the same throughout the term of the loan. While a Variable-rate mortgage, the payments can change depending on the prime lending interest rate.
Risk: It is considered that fixed-rate mortgages are considered less risky than Variable-rate mortgages because the interest rate and payments remain the same. Meanwhile, Variable Rate mortgages can appear more attractive but are open to volatile swings in interest rates.
Let’s Sum it Up!
We hope that the above information gives you some insight into the differences between Fixed Rate mortgages and Variable Rate mortgages. However, there are many other types of mortgages as well, some with combined features and some with different options. Using a Mortgage Broker in Red Deer will help you navigate through all of your options. We can help you determine what type of mortgage is best suited for your long-term financial goals. And we will find you the best one, at the best rate! You can trust the Best Rate Mortgage Broker Team in Red Deer! Give us a call if you have any questions! Or if you are ready to get pre-approved for your dream home, simply complete the online application now!