Home Buyers: Should You Go With a Variable or Fixed Rate Mortgage?

The Canadian housing market has attracted international attention in 2021. Many expected the COVID-19 pandemic would lead to a correction in an already overheated real estate space. We have seen the opposite, as sales and prices have erupted in recent months. Many new buyers are starting to enter the housing arena. Today, I want to discuss the great debate over the variable vs the fixed-rate mortgage.

The case for the fixed-rate mortgage

A fixed-rate mortgage will be more appealing for home buyers who are geared more towards predictability. Moreover, mortgage rates remain at historic lows.

This means that home buyers can take advantage of this historically low rates with a friendly locked-in rate.

Unfortunately, with predictability comes inflexibility. A fixed-rate mortgage, especially at a five-year rate, means that you surrender yourself to a sizable penalty when you seek to break the mortgage contract.

If you are looking to buy and sell in quick order, a long-term fixed-rate mortgage is likely not the best option. However, if you are locked-in for the long-term this is the most practical choice.

Why a variable rate is the better choice

A variable rate is tracked with the prime rate of the lender you have your mortgage with. Historically low rates have made the variable rate a friendly option over the past decade. Of course, this also means that you could fall victim to a sudden rate hike.

Unlike the fixed-rate mortgage, a variable rate allows you to break a mortgage contract and only pay an interest penalty of three months. If you are seeking flexibility, a variable rate is likely the way to go right now.