In 2024, Canadian homebuyers face the ongoing dilemma of choosing between variable and fixed mortgage rates, each presenting distinct advantages and considerations.
Fixed Mortgage Rates
Fixed-rate mortgages offer stability and predictability as the interest rate remains constant throughout the agreed-upon term, typically ranging from one to five years.
As of January 2024, fixed mortgage rates in Canada right now are in the range of 6.95% to 7.5%, depending on factors like creditworthiness and term length.
This consistency protects homeowners from the impact of potential interest rate hikes during the fixed term, providing peace of mind and budgetary stability.
- Predictable Payoff: With a fixed-rate mortgage, the consistent interest allows you to accurately predict when you’ll fully repay your mortgage.
- Simplified Understanding: Fixed-rate mortgages are easier to comprehend compared to variable-rate mortgages.
- Budgeting Confidence: Knowing that your mortgage payments will remain constant provides confidence in budgeting.
- Initial Interest Rate: The starting interest rate for fixed-rate mortgages is often higher than that of variable-rate mortgages.
- Rate Lock-In: Opting for a fixed-rate mortgage means committing to the same interest rate for the entire mortgage term.
- Penalty Concerns: Breaking a fixed-rate mortgage might incur higher penalties compared to variable-rate mortgages for various reasons.
|5-Yr Variable Rate (Closed)
|National Bank of Canada
Categories of Fixed-Rate Mortgages
Apart from diverse term lengths, fixed-rate mortgages come in various types based on the loan structure.
The predominant form is the closed mortgage, wherein adjustments mid-term are not allowed. This type offers limited opportunities, if any, for early mortgage repayment. Breaking a closed mortgage before its term conclusion may result in substantial prepayment penalties.
Less common but available are open mortgages within the fixed-rate category. Open mortgages permit early repayment of the entire mortgage without incurring penalties. Due to the heightened flexibility, interest rates on open mortgages may be notably higher compared to closed mortgage rates.
Variable Mortgage Rates
Variable-rate mortgages, on the other hand, fluctuate with changes in the prime lending rate set by the Bank of Canada.
While variable rates are often lower than fixed rates initially, they introduce an element of uncertainty. As of 2024, variable mortgage rates may range from 8.0% to 10.0%.
Borrowers opting for variable rates should be prepared for potential increases in interest rates, which can lead to higher monthly payments.
- Lower Initial Interest Rate: Variable-rate mortgages often start with a lower interest rate compared to fixed-rate mortgages.
- Increased Loan Qualification: The initial lower payment can enhance your eligibility for a larger loan amount.
- Principal Payment Benefits: Should the prime rate decrease, leading to a lower interest rate, a greater portion of your payments will be applied to the principal.
- Flexibility to Convert: Variable-rate mortgage holders have the option to convert to a fixed-rate mortgage at any time.
- Rising Prime Rate Concern: If the prime rate increases and your interest rate follows suit, a smaller portion of your payments will be allocated to the principal. This could potentially extend the amortization period.
|5-Yr Variable Rate (Open)
|National Bank of Canada
Choosing between variable and fixed mortgage rates depends on individual risk tolerance and market predictions.
Homebuyers seeking stability and a clear financial plan may lean towards fixed rates, while those comfortable with potential fluctuations and seeking short-term cost savings may consider variable rates.
It’s crucial for buyers to carefully assess their financial goals and consult with financial experts to make informed decisions in Canada’s dynamic real estate market.