Historically, variable rates have cost borrowers less overall, but this is not to say that these types of loans are always the best option. A study conducted in 2001, for example, found that between the years 1950 and 2000, variable rates were the most cost-effective choice 90% of the time.
As their name suggests, variable rates fluctuate over the course of the loan and are dictated by a combination of factors like the Bank of Canada’s benchmark rate, the market rates, and even the lender’s risk tolerance.
On the other hand, fixed rates remain the same throughout the mortgage duration regardless of what happens to the market, and lenders charge a premium for this security, making fixed rates higher than initial variable-rate offers. Whether or not one type of interest rate is better than the other, however, depends on a variety of circumstances and components.
External factors, like bonds, also affect the price of borrowed money. While variable rates are the outcome of changes in the benchmark rate set by the Bank of Canada, lenders may base fixed rates on other components, like bond prices. Essentially, they will participate in the bond market by borrowing money and then loan it to their clients at higher rates, profiting from the difference. When yields on government bonds fall, so do fixed interest rates.
Apart from the economic environment, borrowers’ circumstances and objectives also figure in the choice between fixed or variable interest rates. A variable-rate mortgage attracts less severe penalties for early payment completion and is a good option if you are not sure how long you intend to retain the property. On the other hand, if you have no intention of selling your property during the term of your contract, the prepayment penalties are immaterial, and a fixed-rate mortgage, which also offers more security in the long run, may make more sense.
Should a borrower choose a variable-interest loan, however, they must be able to tolerate possible rate increases—and the longer the mortgage duration, the more significant this risk becomes. On the other hand, as far as fixed-interest loans go, one can put a price on peace of mind.
An accurate assessment of one’s borrowing profile like liquidity, cash flow, investment objectives, etc. becomes crucial in this regard. ATP Mortgage Corporation’s experienced professionals can provide you with a free consultation and we encourage you to contact us before choosing a Fixed rate or a Variable rate Mortgage.
TJ Grewal
Principal Broker/Owner