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The same payment means it’s predictable and easy to budget. |
Typically from the offset if you pick a fixed rate, you’ll be voluntarily taking a rate higher than a variable. Also, should you want to make a change and “break” your mortgage in the middle of the term, a fixed rate penalty is likely to be exponentially higher than a variable rate. This is because the penalty usually defers to the “Interest Rate Differential” penalty. Every lender has a different way of calculating this, and some have more severe penalties than others. |
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The static payment means you can still budget. With a variable the penalty to make a change midterm is limited to 3 months of interest. This is the lowest penalty possible if you need to make a change to your mortgage. |
If rates were to increase enough, you can hit something called the “trigger rate”. This means your monthly mortgage payment is no longer enough to cover the interest, and your mortgage could end up in negative amortization. A lender can still ask you to increase your payment, make a lump sum payment, or lock you into a fixed rate mortgage. |
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With the payment adjusting, it means your mortgage is still set to pay off in the designated time. With an adjustable the penalty to break the mortgage is still 3 months of interest, the lowest penalty possible. |
The adjustable payment can create cashflow uncertainty for you. |
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Adding a HELOC to your mortgage is a useful way to access your home equity now for use in the future, without paying interest on the funds until required. This could be used for future renovations, the down payment on a second property, savings interest by not adding a large purchase to a credit card/line of credit, etc. They are “fully open” meaning you can repay the balance in its entirety without any penalty. You only have to pay the interest; meaning maximum cash flow on a monthly basis. |
HELOC rates are higher than mortgage rates because they are fully open. You only have to pay the interest, meaning you could theoretically carry a balance on the HELOC forever. Not all lenders offer them. A HELOC is a “demand loan” meaning a lender can call the loan if they so wish, though this practice is rarely seen. |
Picking the type of mortgage for you should be more than “what’s your best 5 year fixed rate?” Everyone is unique, has different plans and goals, and life changes. As such, it’s important we discuss the above so you’re picking what is most appropriate and has the best features for you.
Different lenders also have different pros and cons to them. Some lenders won’t let you port your mortgage, meaning that great rate you have won’t be coming with you to your next property. Other lenders have significantly lower or restrictive prepayment privileges, meaning you can’t voluntarily overpay your mortgage as much if you want to.
When you look at the stats 60% of Canadians will “break” their mortgage around 36 months into their 5 year term. When they do this, a penalty will be incurred. A lot of banks will tell you they won’t charge you a penalty to break their fixed rate mortgage midterm, but they’ll just factor the penalty into the new rate, thus not giving you their best rate possible. This is one of the reasons a variable/adjustable rate mortgage should be considered by everyone. Coupled with the fact that when you look at the historical stats over the past 25 years, variable comes out on top!
Your life is variable, shouldn’t your mortgage be too?
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