What's the difference between a fixed and variable rate mortgage?

Fixed Rate Mortgage

This is a mortgage that has a fixed rate for the entire term of the loan.  It is a very safe way to ensure that your mortgage payments will remain consistent throughout the entire term of the loan you choose. The benefits of a fixed-rate is that the home owner will not have to prepare themselves for an increase or decrease in their payment frequency. They will always know what to expect when their mortgage payment gets debited from their bank account.  Also, if the home owner decides to go with a 5 year fixed term the amount they will qualify for can be substantially higher than if they went with a shorter term or if they chose a variable rate mortgage.

Variable Rate Mortgage

You have probably heard of Variable Rate Mortgages (VRM) but you may not have a clear idea as to how they work. This type of mortgage has become very popular in recent years as there can be a tremendous advantage over a fixed rate mortgage.

A variable rate mortgage or floating rate mortgage is a loan where the interest rate changes depending on market conditions. Two things to know about variable rate loans are that they are closely related to the Canadian prime lending rate and are generally based on a 5-year term or less. This is a great concept because it allows you to take advantage of low prime rates while securing your position just long enough to allow you not to be tied to a high interest rate if “prime” increases during your term.

Educating yourself on the different VRMs out there can ensure that you pick the best product with the best features for your particular situation.

However, with over 22 lenders offering VRMs how can you differentiate what is the best option? A VRM is harder to qualify for as the lenders will use a special rate called a qualifying rate (generally the posted 5yr interest rate without any discounts) to calculate your mortgage ratios. In certain circumstances it will reduce the amount of mortgage you could qualify for.

How Do I Choose Between A Fixed and Variable Rate Mortgage?

Your Discount Mortgage Canada Inc mortgage consultant can help you decide by reviewing all the different features of each product with you and help determine whether fixed or variable is the way to go.

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