Fixed Rate or Variable Rate Mortgage: What’s My Better Option?
Looking for a variable rate mortgage or a fixed rate mortgage but can’t decide? Ask yourself one question – Do you like consistency or the chance to pay less?
This is one of the most common questions we field at Dominion Mortgage Professional and one that our brokers have come to answer time and time again. When it comes to deciding between variable rate mortgages or fixed rate mortgages it really comes down to a couple of things:
- Your income: the amount of money your household pulls in per month
- Your lifestyle: do you live lavishly? Or are you a penny pincher?
- Your risk tolerance: Are you willing to bet it all to save some money
But before we start:
What’s a Fixed Rate Mortgage?
Basically, a fixed rate mortgage is a mortgage loan where the interest rate on the amount borrowed remains the same throughout the entire duration of the loans term. Pretty simple, no?
What’s a Variable Rate Mortgage?
A variable rate mortgage is a loan where the interest rate floats or adjusts with the fluctuation of prime. The interest rate you pay on your mortgage is reflective of the real estate market. Interest rates are generally lower than those of a fixed rate mortgage but also dependent on the state of the real estate market.
Here’s where your risks comes in when dealing with variable rate mortgages. Sometimes the market is up – sometimes it’s down. It’s all about how much risk you’re willing to take when it comes to interest rates and variable rate mortgages.
Income Will Help Determine Fixed Rate Mortgage or Variable Rate Mortgage
Taking stock of your the income you’re pulling in is the first step in determining what type of mortgage is right you, a variable rate mortgage or a fixed rate:
- How much money do you make?
- How much can you afford to pay on your mortgage monthly?
- Do you have any other debts?
The questions is rather blunt but so it the answer. Generally, you’ll want to allocate about 36% of monthly income to debt – your mortgage included. So that means on top of your mortgage payment you’ll want to tackle your credit cards, student loans, and any other debt you might have all with that 36 percent of your monthly income.
So How Does This All Fit Into the Variable or Fixed Rate Mortgage Debate?
Aside from figuring out how much money you can borrow from a lender, the amount of income you bring in monthly will also determine how much you can pay towards your loan each and every month.
You’ll have to ask yourself if you have some wiggle room in your monthly take home income. With a fixed rate mortgage, your interest rate is set for the duration of loan’s term. That could be 3, 5, or even 10 years.
If you’re working within a fixed income a fixed rate mortgage might be the right choice for you. Your payments stay the same every month. You don’t have to worry about fluctuating interest rates, the market, or anything else. With a fixed rate mortgage you lock in with a interest rate for the duration of your term.
Variable Rate Mortgages Are Not For the Faint of Heart
…but if you have some leeway in the amount you can accolade monthly towards debt payments – they might just be right for you.
Variable rate mortgages float or adjust as the marketing goes up or down. The interest you pay is dependant on Prime with either a +/- percentage attached to it.
If you don’t lay awake a night wondering about your interest rate and what your mortgage payment is going to be this month well a variable rate might just be the direction you should go in.
What Type of Lifestyle Do You Live or Want to Live?
Travelling the world, laying on a beach, or eating every meal in a high class restaurant might be the ideal lifestyle for many of us but when it’s time to take the rose coloured glass off and get back to reality there’s a few things we need to ask ourselves about what type of mortgage we want.
If you don’t plan on keeping your mortgage for the next 30 years and want to pay it off sooner, a lot of mortgage brokers would recommend that lean towards a variable rate mortgage. Why? Well you can make educated prediction on the state of the market in the short term. If don’t plan on staying in the home you’ve take a mortgage out on for the long term – investigate the variable rate side of things.
However, if you plan on staying in the home you invest in for sometime – the fixed rate mortgage might be more up your alley. With a fixed rate mortgage you lock into an interest rate for a predetermined term.
If interest rates are low it might be wise to lock into a fixed rate mortgage for a longer term to maximize both your peace of mind and your interest rate.
It all depends on the lifestyle you have or expect to have – if you want to be in your home for the 30 years consider locking in to a low and consistent fixed rate mortgage. If you’re looking for a starter home and will need to upgrade in a few years, consider the variable rate mortgage.
No Risk No Reward – Which Do You Prefer?
As mentioned, Variable rate mortgages work on a prime +/- system. Meaning, that your with a variable rate mortgage your monthly payments could increase or decrease depending the state of the market at the time your payment is due. If rates have been unusually low for the last few years, well they’re bound to increase – or so the logic goes.
You have to remember that a variable rate mortgage is kind of like going to the casino – sometimes you’re up and sometimes you’re down. It takes a certain type of person to be able to handle the risk involved with a variable rate mortgage. Things could go well and interest rates could remain relatively level or even on a decline. However, they also could not and your monthly payments could end up reflecting that.
Fixed Rate Mortgages Are For Those a Little More Faint of Heart
You lock into a interest rate that remains consistent throughout the term that has been developed. You monthly payments always remain the same – the consistency is there.
However, with risk comes reward. With a variable rate mortgage you’re able to benefit from movement in the market but you might also have to increase payments based on the same marketing.
The decision is yours.
How to Decide on a Fixed Rate Mortgage or Variable Rate Mortgage?
When it comes to deciding between a fixed rate mortgage or a variable rate mortgage you’ll have to ask yourself a few questions and decided how you want to pay your loan for the foreseeable future.
With a fixed rate mortgage you buy yourself peace of mind. For the next so many years, your mortgage payment will be the same – consistent and un altering. The market could go up or the market could go down and your interest rate will stand up.
Where as with a variable rate mortgage you monthly payments could increase or decrease it’s all based on the market.
If you’d like some more information on variable rate mortgages or fixed rate your can contact us here