Which one? Fixed or variable rate mortgage?
Lets start by understanding the difference between a fixed rate mortgage and a variable rate mortgage.
Fixed rate mortgage
A fixed rate mortgage is where the rate of interest and payment are fixed for your mortgage term. As time goes on, more of the mortgage payment goes towards the principal and less of the payment goes to the interest.
Variable rate mortgage
A variable rate mortgage is where the interest rate fluctuates with any changes in the lenders prime rate. If interest rates go down, your mortgage rate and payment go down, but if rates go up your payment goes up. With some variable rate mortgages you can fix the payment and as long as rates stay below your required payment it will not change. If rates rise high enough that you are not covering the necessary payment, your payment will be increased.
Which one is better?
Ask yourself what your ability to handle risk and a fluctuation in mortgage payments is.
Here is an easy test.
Would you worry about the possibility of a 0.25% increase in the interest rate? Stress about the impact on your monthly budget if your mortgage payment changes? Then a fixed rate mortgage is probably for you. You should also take the same test when choosing the length of your mortgage term. If you breathe easier knowing that your mortgage payment is fixed for the next 5 years then that term is right for you.
It's pretty simple. If you don't like risk, then a longer fixed rate mortgage term is likely best for you. If risk and payment fluctuations are not as much of an issue for you, then a variable rate mortgage could be the way to go. The bottom line: long term stability has a price but if you can't sleep at night what good is the money? Contact me if you have any questions!