The journey to home ownership can be a difficult road. We all know house-hunting can be lots of fun. But let’s face it — securing your finances to seal the deal can be overwhelming and outright painful. Despite promises from banks that obtaining the perfect mortgage is very easy, the truth can be quite the opposite.
Interest rates in Canada have hit historic lows. The Bank of Canada has kept the key lending rate unchanged since the days of the global economic recession. This is so that Canadian households will not go into financial ruin over a sudden spike. It’s important to always keep this factor in mind as you go about securing a mortgage.
There are two main types of mortgages in Canada: Fixed Rate and Variable Rate. There are definite advantages to both types. But before committing to one, you should take an assessment of a few things: Your financial habits, your behaviour when it comes to handling risk, and your income stability.
Variable Rate Mortgage
If you want to reap the full benefits of Canada’s low interest rates, the Variable Rate mortgage may be your best bet. Under these lending terms, interest rates are directly tied to the key lending rate set out by Canada’s central bank. This means that the interest you pay on your debt is always susceptible to fluctuation. When rates are low, you pay less. But beware: If the Bank of Canada does decide to increase its key rate, your interest payments will increase as well.
Although the Variable Rate mortgage can be a bit of a gamble, many banks offer features that keep this type of loan somewhat more secure. Ask your mortgage representative if you can keep your monthly payments the same throughout the term. This way, your payment amount is always consistent — allowing you to stay on top of your household budget. No surprises when it comes to how much money you will need each month, even if your interest rate happens to change. If the bank’s lending rate goes down, more of your monthly payment will go towards the principle. If the rate goes up, more of your monthly payment will go towards interest. It’s that simple.
Fixed Rate Mortgage
Let’s say you’re a first-time homebuyer and want to play it safe. Or perhaps you’ve owned many properties in the past, but still aren’t comfortable with some of the risk associated with a variable rate. In that case, the Fixed Rate mortgage may be a better option for you. A Fixed Rate mortgage plays out exactly the way it sounds. Your interest rate remains unchanged throughout your term. A five-year term is usually the norm. The great thing about fixed rates is that you always have peace of mind. You can budget the financial needs of your household much more easily under these conditions. And you’ll also get a more accurate sense of how much principle you will have paid down over time.
However, there are drawbacks to Fixed Rate mortgages as well. The interest rate for this type of loan is always higher than the interest charged on a Variable Rate loan. Banks charge a premium for the luxury of going with a fixed rate. That’s because it is the lender who is taking on the risk — not you, the borrower. But just because a bank’s lending rate is a bit higher, that doesn’t necessarily mean a Fixed Rate mortgage is not a good choice. Sometimes, you just can’t put a price on stability. Life can throw us unexpected curve balls — we could lose our job or there could be a sudden emergency in the family. The last thing you’d want under these circumstances is the instability that can come along with a Variable Rate mortgage.
Keep in mind however that if the key lending rate happens to go down while you’re locked into a Fixed Rate mortgage, you can always look into refinancing your loan under a brand new set of conditions.
Whatever loan you decide on, make sure that it’s within your affordability range. The best way to shop around is through a knowledgeable mortgage broker. A broker is well-connected to the industry and can expertly guide you through your financial journey.
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