News & Views
Finding your dream home can be exciting, and finding the right mortgage can be a dream come true. It's important to know what each type of mortgage offers, so you can choose the right mortgage for your lifestyle. Knowing the difference between a Fixed and Variable Rate Mortgage is key.
Fixed Rate Mortgages allow you to lock in a set interest rate for the term of your mortgage. This means that your payments will not fluctuate when interest rates change. Fixed mortgages offer peace of mind for home buyers who want to know upfront that their payments won't change over the term of the mortgage.
Variable Rate Mortgages (VRM) typically offer one of the lowest mortgage rates available. They allow you to take advantage of declining interest rate environments to pay off your mortgage principal faster, but you have to be comfortable with the fact that your payments could change over time.
Tips
Choosing a VRM is a long-term strategy. To prepare for changes in rate, you can top up your regular payments with extra payments to the principal. That way, if rates increase, you can just reduce the top-up payments, and the change won't impact your monthly cash flow.
Both types of mortgages have their benefits, and it's wise to be prudent and choose the right fit for your lifestyle and risk threshold.
When researching your mortgage options, it's important to understand the features of each mortgage type - including prepayment options, penalties, portability, amortization, etc.
Another thing to consider is what will happen if you decide to switch or pay out your mortgage prior to the end of the term. In these circumstances, both Variable and Fixed Rate Mortgages typically have a prepayment penalty of 3 months interest. However, with a Fixed Rate Mortgage, you may instead have to pay the Interest Rate Differential if this is higher than 3 months interest. (An Interest Rate Differential is applicable when the borrower pays off a loan before maturity at a time that interest rates are lower than the borrower's loan. The Interest Rate Differential amount represents the difference between interest that the lender would have obtained from the borrower if the borrower kept with the loan, and interest that the lender can obtain under current interest rates.)
Consider your financial flexibility and how open you are to market fluctuation when trying to decide on a Fixed or Variable Rate Mortgage, and make the choice that's right for you.
House Hunting Tip:
When searching for your dream home, remember, don't just look at the house; look at the neighbourhood too. It's easy to get lost in the allure of a beautiful house online, but it's also important to consider where your dream home will be located. Finding the right house in the right neighborhood is not always easy, but keep in mind that if you decide to sell one day, the home could be more challenging to resell if the neighborhood doesn't appeal to future buyers. Check out the street to see if there are any other homes for sale, or if the general area seems neglected or run down. Also do your research and find out what the school district is like and how accessible amenities are to the home. If schools are good and amenities aren't a far commute, these could just be the deciding factors for future home buyers when you're ready to sell.
