Wondering which type of mortgage rate is best for you...fixed or variable? In this episode, we discuss the differences between the two types, when you should choose between them and what the best recommendation is for first time home buyers.
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Hi everyone, welcome to another edition of Homebuyer's School.
Today I'm joined by Mujtaba Syed, Mobile Mortgage Specialist with TD Canada Trust. And the question we're gonna answer is:
What's the difference between a fixed and a variable mortgage?
So Mo, what is that difference? [00:00:30]
So a fixed rate and a variable rate are just two different types of mortgage rates that are available from the bank.
So a fixed rate just means that your interest rate is fixed, your term is fixed, whichever one you had picked. And for that certain period of time.
So if you have a five year fixed, it just means that your rate is gonna be fixed and your payments will be guaranteed for that time period.
A variable just means [00:01:00] that everyone with the five year variable, that the term is guaranteed for five years. But the rate can fluctuate with prime.
So if prime went up, your rate will go up. If prime went down, your interest rate could go down affecting your payments in both scenarios.
So when should I pick a fixed and when should I pick a variable mortgage?
So that's a very personal thing.
So, if you feel like you're very comfortable with variable, you're comfortable with taking risk and you feel [00:01:30] like in the future the rates are gonna down?
Variable is a very good option for that because if rates do go down, it will actually impact your rate which would also come down.
But if rates ever did go up, it would actually impact your mortgage rates as well and determining what the payments are going to be based on the new rate.
A fixed rate's very good if you are very determined to pay off your mortgage and you feel like you have a monthly budget put in place. And you feel like this is very [00:02:00] comfortable for you.
You don't want your payments to go up, fixed rate is very good in that scenario as well.
If I was a first time home buyer, what type of mortgage would you recommend?
For my clients, for first time home buyers, I'd definitely going to five year fixed is because it is your first time getting into a house.
You have to set yourself a monthly budget and you're very comfortable with that budget.
Any surprises could actually throw that budget off, so if you're very comfortable with the payments that you've set for yourself? [00:02:30]
Get the five year fixed, get comfortable with it and after five years after having some experience with your mortgage?
Definitely take a look at other terms and other rate types, like a variable to see if you're comfortable with that.
What are the benefits of fixed and variable rate mortgages?
Is there any ... ? I guess maybe I'm talking about pros and cons but is there a way that in the long run, a fixed or a variable you come out ahead? Or do you save more money with a fixed, do you save more money with a variable? Or is it all dependent on the personal situation?
[00:03:00] No, absolutely, that's a great question.
So it really just depends on a lot of different situations.
So in Canada for the longest time and then recently we've had historically low fixed rates, so it would just ... It was a great time to get into interest rates in the last couple a years where interest rates were very, very low.
But that is changing now.
So a variable could be a very good option at that time, even though variable rate is going up. Historically, variable has done a lot better.
It just averages a lot better with the ups and downs overall. You tend to do a little bit better.
[00:03:30] Once again it's just based on personal preference. But historically, five year variable has done better than a five year fixed.
So Mo do you have anything else to add for fixed or variable mortgage rates?
Yeah, so the best thing I would recommend is just having a great conversation with your specialist home lender to see what's best for you.
Maybe a fixed makes more sense, maybe a variable will make more sense.
But it's really just depends on your personal preference. And with the right knowledge you can actually pick the one that's best for you.
Great. Well thank you very much Mo.
Thank you very [00:04:00] much everyone for joining us.
And remember to watch our previous video on the new mortgage rules in Canada.
Let us know if you have additional mortgage questions or home buying questions that we can answer by submitting them in the comments section below.
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About Mujtaba Syed:
Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.