Fixed rates are often considered less risky but variable rates could cost you less. So which type of interest rate should you choose? The decision between a fixed, variable or combined rate will depend on your personal profile and what you’re looking for in terms of ensuring stability or paying off your mortgage sooner. To help you decide, here’s an overview of the different types of rates.
When you opt for a fixed-rate mortgage, you’re making a commitment to pay interest calculated at that rate for the entire mortgage term, regardless of how market rates fluctuate during that time. A fixed rate is considered more secure than a variable rate because it can’t increase over time, even if benchmark rates rise.
When you’re shopping for a mortgage solution, you’ll probably notice that variable rates are often lower than fixed rates.
On the one hand, a fixed rate allows you to determine precisely how much your payments will be. On the other hand, a variable rate lets you make the most of a favourable market, which has been the case in recent years.
On average, a variable-rate mortgage costs less over the long term. Since homeowners with a variable rate often pay less interest than they would with a fixed rate, they can pay off their mortgage faster. However, there’s no guarantee how markets will perform in the future.
If you’re having trouble deciding between fixed and variable rates, you may want to consider a hybrid solution: a made-to-measure mortgage.
It’s possible to divide your mortgage loan into any number of portions and apply different parameters to each portion. For example, you could go with a fixed rate for 25% of your mortgage and a variable rate for the other 75%.
You also have the option of choosing a different term, payment frequency and amortization period for each portion. Another strategy is to use a mortgage line of credit for one of the portions.
A mortgage advisor can help you decide the best possible combination according to your needs.