Should Investors Choose Fixed or Variable Rates?
Should Investors Choose Fixed or Variable Rates? While there are benefits of both sides, we need to look at the details so you can make an educated decision.
Benefits of Variable Mortgage Rates
- Historically, variable rates are lower. A York University study found that over the past five decades, nine out of ten Canadians paid less interest with variable rates.
- You can lock in a favorable (low) variable rate by converting it to a fixed rate when dealing with a lender who allows it (also known as an open variable rate).
- Lower penalties for breaking a mortgage. This can be huge for real estate investors as you want to exit a mortgage prematurely.
- You can fix payments (with some lenders) so that only the amount towards your principal changes with a shift in the prime rate.
- As of October 2016, five-year fixed-rate buyers have to pass a stress test that ensures they will be able to carry their mortgage if rates rise. This now puts fixed rates in the same space as variable, but without the lower rate benefit. The one thing that set fixed rates apart has now been diminished.
Benefits of Fixed Mortgage Rates
- Your interest rate (and thus mortgage payments) won’t change until it’s time to renew your mortgage. This provides a sense of comfort for investors who don’t like risk.
Many people debate if the gap between fixed and variable rates will continue to widen in the future. There are two reasons this could happen. For one, bond yields (the main financing cost of fixed-rate mortgages) could rise which will continue to hike up fixed-rate mortgages. Then there is the Bank of Canada’s benchmark interest rate (affects variable rates) which shows no sign of moving, leaving the prime rate in a prime position for you.
This decision of fixed vs. variable rate is a perfect example of why you need the help of an investor focused mortgage broker who can look at your specific situation and make a proper recommendation.
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