The question of what kind of mortgage to choose has been on everyones mind, especially since the interest rates have decreased over the past few years. Not only are we deciding whether to go with a variable or fixed rate mortgage, but also whether to lock ourselves in for a 5 or 10 year term.
First lets look at the advantages and disadvantages of variable vs. fixed:
Variable interest rates, along with mortgage rates, change over time depending on the prime rate. The advantage is that this is generally less expensive, however the disadvantage is the financial insecurity that comes with it. Significant changes in interest rates could cause your mortgage rates to fluctuate.
Fixed rates on the other hand are unchanging, which means your mortgage payment will be consistent each month. The advantage of course, is stability, however you could end up stuck if interest rates go down. You can always choose to refinance, but with huge penalties assigned by the banks, this could end up costing you a bundle.
Next question: Do you go for a five year or ten year mortgage term?
The current rates are so low that this has become an even more important question than fixed or variable. The answer however, is easy. Unless you’re planning to be mortgage free in the next ten years, you should definitely go with a ten year rate as long as two factors are in place: Your mortgage needs to be assumable and transferable.
Assumable basically means that if you sell your home, the new occupants can take over your mortgage if you no longer require it. This would give you a strong market advantage over other sellers in your area. Transferable means you can bring your mortgage over to a new home you’ve purchased.
Another benefit to note is that under Canadian law, if you break your mortgage, and it’s over five years, you can only be charged for three months interest.
You should also consider a payment schedule on a weekly or bi-weekly basis. This will save you money in the long run, as more of your payment goes towards the principal, and you end up paying off your mortgage sooner….always a cause for celebration!
