Buying a home can evoke a lot of emotions from excitement to confusion… there are a number of things to consider, starting with your mortgage type. Typically, there are two options to choose from: a fixed rate mortgage or a variable mortgage.

Fixed-Rate Mortgage

When it comes to a fixed-rate mortgage, your interest rate is fixed so it won’t change until it’s time for renewal. This usually happens after five years but can also be longer or shorter, depending on your term.

Your payments will never be a surprise. You will always know how much is going towards interest, and how much is going towards the principal of your loan.

Variable-Rate Mortgage

A variable mortgage fluctuates based on the Bank of Canada’s prime rate. For example, the current prime rate is 2.45%*.  One month you could be paying prime +0.2%, meaning you may pay a little more, but the next month could be prime plus -0.5%, so you’d be paying a bit less.

It can be beneficial if it swings in your favour, but the opposite is also true. They do tend to be less expensive in the long term, but it all depends year-to-year.

Pros and Cons

Fixed rateVariable rate
ProsNo surprises here. You can rely on paying the same amount month-to-month for the term of your mortgage. This can make it easier to budget and gives you some peace of mind.Historically, variable rates have proven to be less expensive.
ConsThe rate tends to be higher when choosing fixed. You could end up paying a premium for the stability of a rate that doesn’t fluctuateA variable rate can bring a bit of uncertainty. The prime rate can increase your payments and cause some financial strain you may not have been expecting.

Before you begin your search for a home, you should always start with a pre-approval. At this stage you will choose between the two options, and find out how much spending power you have, allowing you to shop for a home within your budget.

Natalia Jackson, Mortgage Broker for the Dan and Alex Real Estate Team can assist you in kickstarting your home buying journey. With over ten years of professional experience, she’s helped many clients reach their goal of home ownership. Click here to start your pre-approval process with Natalia.

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*At time of writing article

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