How to Decide Between a Fixed Rate and Adjustable Rate Mortgage

For those deciding to buy a new home, the next question for most is how they’re going to pay for it. Very few home buyers have the cash to buy a property outright, so a mortgage is necessary. The two main options are fixed rate mortgages and adjustable rate mortgages. Here are some guidelines on how to know which type of mortgage is right for you.

If You’re Risk Adverse …

If you are risk adverse, the best choice is a fixed rate mortgage. You’re locking in the interest rate when you secure the mortgage, and that rate won’t change unless you refinance the mortgage when you choose. You don’t have to worry about rate hikes driving up the cost of your mortgage, putting the ability to afford your home at risk.

If You Want a Deal Now …

One of the advantages of an adjustable rate mortgage is that the initial rate is typically well below the rate for a fixed mortgage. If you have the discipline to save the difference and pay down your mortgage, you’re paying off your home faster. The risk you’re taking with an adjustable rate mortgage is that mortgage rates will jack up after the Bank of Canada raises rates, and you may see the mortgage bill climb faster than expected. And you’re running the risk you cannot afford your home if interest rates go up too fast, though refinancing to a fixed rate mortgage resolves this issue. Trusting a Fort Mcmurray Mortgage Broker can save you tons of money and also time.

If You Think the Forecasts Are Wrong

Analysts expected the Bank of Canada to raise interest rates at the October, 2017 meeting. They didn’t, because Canada’s inflation rate remains surprisingly low despite strong economic growth. Then there’s the fact that the rate increases that already occurred may weaken Canada’s economy. This would strangle growth and lead to very low interest rates again. If you think the projections of a roaring economy and high interest rates are just wrong, an adjustable rate mortgage allows you to keep your mortgage payments low while you retain the option to refinance when interest rates are even lower.

If You Think Mortgage Rates Will Stay Low …

An alternative to an adjustable rate mortgage is Canada’s most popular mortgage – the five year fixed rate mortgage. This gives you a fixed rate mortgage renewed after five years, though you can refinance it before that time. At renewal, you can lock in a new mortgage at the current interest rate with the same lender or a different one. Many lenders offering five year mortgages are slow to pass on rate increases to customers because they don’t want to slow down the housing market. If you can find a lender with a low rate five year mortgage, you can buy the property now and focus on paying down the loan, increasing your income or saving up money to pay down the principle when you renew the mortgage so that higher interest rates don’t matter as much. The five year mortgage is a good choice for those who think interest rates will be as low or lower in the future, since they don’t have to pay the onerous costs charged when refinancing a long term fixed rate mortgage.
What if five years seems too long? There are three year and four year fixed rate loans available, too.