Last week I had the pleasure of meeting up with Jessi Johnson of the Jessi Johnson Mortgage Team to discuss the merits of a Variable Rate Mortgage versus a Fixed Rate Mortgage.
What is a variable rate mortgage?
This is a mortgage that has an interest rate that changes in line with the Bank of Canada’s prime rate.Variable rate mortgages tend to have a lower interest rate than a fixed rate mortgage, but the interest rate on a variable mortgage can change at any time.
What is a fixed rate mortgage?
A fixed rate mortgage has a set interest rate that does not change over the life of the mortgage. The interest rates for these mortgages are set by the international bond market. The interest rate (and the amount of interest paid) on a fixed rate mortgage tend to be higher than a variable rate mortgage.
Should I got for a Fixed or Variable rate mortgage?
That depends on what you value personally. If the possibility that your mortgage payments could increase drastically keep you up at night, then the certainty of a fixed rate mortgage might be the best option for you. If you’re comfortable with some changes in your mortgage payment and like the lower interest costs that are sometimes associated with a variable, then this mortgage might be the right product for you.
PLEASE NOTE ** I’d love to hear your thoughts and questions in the form of a comment below! **
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Go variable if you can afford it !
Hi Jessi,
Good to hear from you.
I recently bought a house and that’s what I did.
I am able to pay down waaaay more principal with a variable rate mortgage (2.15%) than I would be with a fixed (3.79%). I am fine with fluctuations in rates and I like the higher principal payments because I want to pay this mortgage off quickly.
Thanks!
M
hey guys,
Any thoughts on the new mortgage terms the government is thinking about? They arent very specific but it would probably mean the end of 5% down 35 year mortgages. I keep hearing people say these mortgages make up a small percentage of the market, but everyone in the mortgage business seems to think changing it to 10% down 30 year mortgages would kill the market.
And about the fixed mortgages. Most canadians go for a 5 year fixed mortgage because anything higher than that brings on a rate of around 6% (give or take). This does provide security, but at the end of 5 years you have to renew at whatever the current rate happens to be. I think that could actually be worse than seeing the rate slowly rise with a varriable rate. Going from 4% to 8% in 1 day seems like a much bigger shock than going up from 2.25% by about 0.5-1% per year. Too bad we cant be like the americans with 30 year mortgages at 6%. That would be security.
Hello Davers,
Please allow me to sincerely apologize for my delay in responding. I was out of town on vacation and just got back yesterday.
I don’t think they should cut out 5% down completely but instead only make it available for people who aren’t over leveraged. Currently we are able to use up to 44% TDS (total debt servicing ratio) with a 5% down payment. My suggestion is to decrease that number to 40%. This forces people to keep their debt load down which teaches better financial planning. A large portion of first home buyers are coming into the market with only 5% down. By increasing the minimum down payment, you will probably lose upwards of 20% – 25% of potential purchasers which our economy needs until economic stability isn’t dependent on the real estate market.
By decreasing the mortgage amortization from 30 – 35% won’t cause a huge affect in the suburbs but will certainly cause issues downtown. The properties are already overpriced and out of reach for many purchasers even with a 35 year am. Personally, I wouldn’t change the 35 year amortization but perhaps again only offer it to those who aren’t over leveraged.
Regarding your next point: even with a 30 year term, the American’s are still defaulting for various reasons. It is very doubtful that you will see an increase of 4% overnight and your broker will generally give you warning signs via newsletters etc. Keep in mind, you can always take the frozen payment option with VRM’s. Call or email me if you would like an explanation on that option.
There is a comical but true rule is banking to remember; lend to those who don’t need the money and don’t lend to those who need it.
Hope that helps.
Check me out at http://www.jessijohnson.ca
Hi Dave & Jessi!
Happy New Year!
Good to hear from you both and thanks for your patience! I was away as well and could only now comment.
I like Jessi’s idea of altering TDSR.
I think the Feds are using threats of action to cool the real estate market. The Fed are afraid of taking real action because of the precarious nature of the economy. What they are proposing could be an indicator of changes to come.
What are your thoughts?
[...] Last week I had the pleasure of meeting up with Jessi Johnson of the Jessi Johnson Mortgage Team to discuss the merits of a Variable Rate Mortgage versus a Fixed Rate Mortgage. [...]