You are here:   HomeMortgage RatesUnderstand The Two Types of Mortgage Rates

 Ever wonder what your mortgage interest options are?

 

Many Canadian banks and other lending institutions use various names to describe their products which makes the potential borrower feel there are several different types of mortgages. They do this marketing trick to make their product more attractive to potential customers and led the borrowers to think their product is unique. The truth is there are really two types of mortgages in Canada:

a) Fixed rate mortgage (FRM)
b) Variable rate mortgage (VRM)

Both mortgage types have pros and cons, we will look at the two mortgage types in closer detail below.

FIXED RATE MORTGAGE

This type of mortgage has preset interest rate for the whole term. It is the most popular mortgage product in Ontario and in Canada in general. Most borrowers decide to go with 5 year mortgage term but it is not a rule and most lenders offer shorter and longer mortgage terms like 6 months to 10 years and more. With fixed rate mortgage you know exactly how much your payment will be for the remainder of the term. It provides security and does not change even if economic situation changes during the term. 

Usually you have to pay premium in terms of slightly higher mortgage interest rate for the security of fixed rate but with many lenders offering various prepayment options you can still save money on your mortgage payments and pay off your mortgage years sooner.

Usually fixed interest rate mortgage is usually recommended for firs time home buyers so that they can manage their household budgets easier without the worry of having their payments increased.

PROS:

  • Immunity to interest rate fluctuations
  • Known monthly expenditure in terms of identical payment amount each month
  • Easier budgeting
  • Great choice if mortgage rates go up during the term of the mortgage

CONS:

  • Usually higher interest rate at time of sign up
  • Even if rates go down during the term the borrower is stuck with the rate in contract
  • Poor choice if mortgage rates go down during the term of the mortgage
     

VARIABLE RATE MORTGAGE

In this type of mortgage interest rates change depending on prime intrest rates offered by the bank or lender. The contract will list the mortgage rate as Prime +/- rate. So when Prime is at 3% and your mortgage documents show actual interest rate of Prime + 0.1% your effective mortgage rate will be 3.1%. When the Prime rate changes your mortgage rate will follow eaither up or down.

Taking out variable rate mortgage is outside comfort zone of most mortgage holders, only one in seven decides to go this route. Whether the variable rate mortgage turns out better then fixed rate mortgage depends on what happens to interest rates in the future and nobody can predict that.

If the mortgage interest rates drop significantly your mortgage payment might drop even by $100.00 or more. If the mortgage interest rates goes up by a lot your payments might go up $100.00 or more. Even though historically the variable mortgage has been less expensive than fixed rate mortgage the variation in mortgage payments from one month to another can wreck havoc on your budgeting.

If you are deciding to go the variable rate mortgage route you also have to be sure that you can accomodate possible monthly payment increase on your mortgage.

PROS:

  • Historically less expensive
  • Lower mortgage payments when mortgage interest rates go down


 CONS:

  • Mortgage payments can vary significantly from month to month
  • Higher mortgage payments when mortgage interest rates go up
  • More difficult to budget for
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Walter Pawlowski Ontario Mortgage Agent M11002486