Fixed or variable rates?

Choosing between fixed or variable mortgage rates.

You’re looking for the best mortgage for your situation and the choices available to you can be a cause for both confusion and potentially higher costs over time.

There are basically two types of mortgages:  variable rate and fixed rate, with variable rate mortgages typically offering a lower interest rate, at least initially.

Either type of mortgage can be open or closed. An open mortgage can be paid off or you may make additional payments at any time without penalty. A closed mortgage has reduced repayment flexibility but comes with a lower interest rate than an open mortgage.

With interest rates low, the cheapest mortgage option would seem to be a closed variable rate mortgage – at least on the surface, but let’s look deeper.

A fixed rate mortgage provides the security of a locked-in interest rate for the term you choose – so if peace of mind is important to you, if you want a stable mortgage payment over the term, if you’re managing on a tight budget, or if you have a large mortgage and won’t be able to make additional monthly or lump sum payments, this choice can make sense for you. On the other hand, when your mortgage comes up for renewal, you will likely have to select a new mortgage at whatever rates are available at that time.

The interest rate of a variable rate mortgage is linked to the prime rate so it can fluctuate either up or down sometimes very quickly based on the Bank of Canada’s overnight rate – and that will definitely have an impact on your total interest cost and perhaps your monthly payment. Even if your monthly payment remains the same, when interest rates rise, the amount applied to the principal will be reduced. Will interest rates rise? Probably – they are currently at historic lows, so there appears to be nowhere to go but up.

One mortgage option that’s gaining traction is the blended rate mortgage, which offers a combination of both fixed and variable rate financing and blends the benefits and risks of each.

The best choice for you depends on your personal financial objectives, your overall financial plan and what some experts term your insomnia factor.

Andy Erickson is the division director with Investors Group, Vernon. This article is provided for information purposes only. Consult with a professional advisor before implementing a strategy.