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.

Just Posted

Youth athletes get $22k from Kelowna builder

Mission Group supports a group of ten elite cyclists and triathletes from around Kelowna

UPDATE: Tsunami warning cancelled for coastal British Columbia

Warning issued following 7.9 earthquake off Kodiak, AK

Coordinated search finds missing Kelowna boy

All available police resources were called in to help find a missing boy Monday afternoon

Kelowna students leave for downhill challenge

A group of students from UBCO is ready for annual concrete toboggan race

Kelowna’s Serwa named to Olympic team

Kelsey Serwa is one of eight Canadian ski cross athletes headed to PyeongChang

Your Jan. 23 Morning Brief

Check out the top stories of the day in the Okanagan-Shuswap with Carmen Weld’s Black Press Morning Brief.

Taylor: Humans the theory makers

Lake Country columnist Jim Taylor writes weekly in the Calendar

Man faces 48 charges in string of random Toronto shootings

The string of unprovoked shootings began Jan.9, say police

Slayer adds Penticton to North American tour

Slayer adds the South Okanagan Events Centre as a stop on their last tour

‘Shape of Water’ producer, Christopher Plummer among Canadian Oscar nominees

Guillermo del Toro film about merman romance earns 13 nominations

Vancouver Canucks confirm participation in NHL Young Stars

Canucks confirmed participation, at least for this year, in the NHL Young Stars event in Penticton

Canada, TPP agrees to revised deal without the United States

Canada and the remaining members of the Trans-Pacific Partnership have agreed to a revised trade agreement

Tsunami warnings 101: Canada

Here are some things to know about tsunami alerts in Canada and how they work

Rogers Media cuts ties with Vice Canada

Rogers Media and Vice Canada are ending their three-year-old partnership, pulling Viceland TV channel off the air

Most Read