Of Prime Interest: Choosing the right mortgage

…variable rate mortgage where the interest rate can fluctuate month to month.

  • Oct. 27, 2015 10:00 a.m.

One of the most popular types of mortgages is the fixed rate option. A five-year fixed rate mortgage is currently available as low as 2.59 per cent.

Fixed rate means the interest rate remains the same over the term of the mortgage, in contrast to a variable rate mortgage where the interest rate can fluctuate month to month.

If you have a set budget and want to have a predictable monthly payment, a fixed-rate mortgage might be your best option.

While fixed rates haven’t been this low in decades, a risk associated with a fixed rate mortgage is the penalty you may face should you need to prematurely pay off the mortgage.

Penalties can range from a three-month interest penalty to what is referred to as an interest rate differential, the difference between your original mortgage interest rate and the interest rate that the lender can charge today when relending the funds for the remaining term of the mortgage.

An interest differential is an unknown, and depending on rates at the time you pay the mortgage off and how far along in the term the mortgage has progressed when you pay it out, an IRD penalty can be devastating.

Rates for fixed mortgages tend to be strongly linked to the bond market. In most cases, when the bond rates go up fixed rate mortgages follow with an increase.

With a variable mortgage, if the prime rate increases or decreases your rate and payment will fluctuate.

However, a variable rate mortgage typically offers more flexible terms than a fixed rate mortgage. And you can convert from a variable to a fixed rate at any time without a penalty.

You will be offered the fixed rate available at the time of conversion.

Variable rates are linked to the prime interest rate set by the Bank of Canada.

The Bank of Canada is not a commercial bank and their principle role, as defined in the Bank of Canada Act, is “to promote the economic and financial welfare of Canada.”

A variable rate mortgage might be right for you if your budget is somewhat flexible and you feel comfortable with fluctuating interest rates. Historically, choosing a variable mortgage rate has been more cost-effective than locking in on a five-year fixed rate.

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