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Fixed vs. variable rate mortgages: Which option is right for you?




The hours of scrolling through real estate websites are finally over. No more open houses, market speculation, or dwelling on the one that got away.
 
You found the home that’s perfect for you.
 
And now it’s time to find the mortgage that’s right for you too.
 
That’s simple. Secure the lowest interest rate and call the moving company, right?
 
Well, not exactly. Securing a mortgage isn’t always about finding the lowest rate. There are other factors to consider when choosing the mortgage that best suits your needs, like:
 
How comfortable are you with risk?
Is there a chance you might move before your mortgage term is up?
How much do you rely on a stable budget?
 
It’s important to understand what’s available and make the smart choice when it comes to financing your home.
 
Let’s take a look at your options.
 

Fixed rate mortgage

Fixed rate mortgages are the predicable option.
 
The rate you secure remains consistent for your mortgage term, meaning your monthly payments (however you structure them) stay the same.
 
What is the main benefit of fixed rate mortgages?
 
Peace of mind
Make predicable payments with no surprises. Perfect for the risk-averse.
 
The downside?
There is the potential to miss out on decreasing interest rates over your term. Plus, if you needed to get out of your current term, you’ll likely incur a larger penalty.
 

Variable rate mortgages

Variable rate mortgages have a fixed term and a fluctuating interest rate based on any movement in the lender’s prime rate.
 
It is important to understand how your provider arranges payments. In some cases, your mortgage payments remain the same for the term, the amount paid toward the principal hinges on the interest rate at the time – if the prime rate goes down, more of your payment will go toward your principal. And if the prime rate goes up, you guessed it; you pay more in interest.
 
In some instances, payments may vary with changing interest rates. This may make budgeting difficult, however, in a rising rate environment it helps to ensure payments are being applied in line with your original amortization so you don’t fall too far behind.
 
So why choose a variable rate mortgage?
 
Initial savings
Typically, variable rate mortgages carry a lower interest rate than their fixed counterpart allowing you to take advantage of savings initially, and potentially through to the end of your term.
 
Remember: Prime rate is subject to change and has increased three times since April 2017. It’s important to assess how any interest rate bumps will impact you financially.
 
Cheaper financial penalties
If you sell or choose to refinance your mortgage mid-term, the penalty to break contract will only cost you three months’ interest. Whereas breaking a fixed rate mortgage (closed) carries a penalty of the greater of three months’ interest or interest-rate differential (IRD).
 
You’re okay with risk
If the thought of fluctuating interest rates doesn’t faze you, there’s potential to save by choosing a variable rate mortgage.
 
The downside?
There is always a chance that increasing interest rates could work against you.
 

What’s your next step?
Consider how fixed and variable rate options fit into your life, and speak to a Meridian Mortgage Specialist to make an informed choice when it comes to your mortgage.

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