Should I get a fixed or variable mortgage?
Ah, yes - fixed vs variable mortgages, a tale older than time itself... 🦄
Here's whats up. 💁♀️
Fixed rate mortgage
Why you should go fixed
Easier to sleep at night knowing exactly what your payments will be.
It's a lot easier to budget and plan your finances with a fixed mortgage payment.
Fixed rate mortgage interest must be compounded semi-annually by law, so no odd interest rate shenanigans can happen.
Why you shouldn't go fixed
Breakage penalties on fixed rate mortgages can to be very high (Interest Rate Differential penalty).
Breakage penalties are generally even higher on fixed rate mortgages from banks. Banks calculate your breakage penalty based on their “posted rate”, instead of your actual interest rate. This can increase your penalty payment by thousands of dollars.
Rates tend to start significantly higher that variable mortgages
Variable rate mortgage
Why you should go variable
Variable rate mortgages historically outperform fixed rate mortgages in terms of least interest paid
Generally much lower breakage penalties (3 months interest penalty)
Why you shouldn't go variable
Unknown future payment can make it harder to sleep at night.
It's more difficult to budget and plan your finances with a variable mortgage payment.
Variable rate mortgages do not necessarily have their interest compound semi-annually like fixed rate mortgages do. Watch out for mortgage products that are compounding your interest monthly, etc. You will end up paying a lot more in interest.
Some lenders will keep your variable payment as a fixed amount every month, but adjust the portion that gets paid to principle/interest as the the prime rate varies. This is generally something you do not want, and can lead to unknowingly increasing the amortization of your mortgage. For example, you thought you would have your mortgage paid off in 25 years, then one day you find out it's actually going to be paid off in more years 27 years...)
The average Canadian breaks their mortgage three and a half years in. Life seems to happen. You get a new job in a different city, you have kids, etc.
If interest rates increase, it is possible to break a fixed mortgage and have no penalty at all. Fixed mortgage IRD (Interest Rate Differential) penalties are structured this way intentionally. If the lender can can lend the money they lent you for your mortgage out again at a higher interest rate, they are not very incentivized to penalize you to get the money back.
Most experts agree that variable mortgages are the best bet. However with the modern economic environment being so strange and unstable, there is likely a lot more disagreement than usual.
Clear as mud?
No problem! Buying a house in Canada can be confusing as hell (and it doesn't help that half of the information online is wildly outdated and often straight up incorrect).
Some of us like to be lazy and just want the best deal. That's why we made Houski.
Houski figures out what you can afford by looking at your banking history, collects all your mortgage documentation for you, automatically and then finds the mortgage professional on our network that has the best available deal for you. We then connect you with them to finish buying your new home. Simple as that. 😎