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Fixed or Variable Mortgage?

Things to consider before choosing one or the other.

1. Can I afford to take a variable rate mortgage?

There is some risk associated with variable rate mortgages, so if you go this route, you must be able to mitigate the risk if rates do rise.

One method of protecting yourself involves setting your payment to a fixed amount that’s higher than the minimum requirement. For example, setting your payments based on the current five year fixed rate will allow you to provide a buffer in the event that rates rise and, because you’re paying more than the minimum amount, you’ll be paying more of your principal as well.

Opting for a 35-year amortization but paying the 25-year amortization-sized payment is another way to protect yourself from increasing rates. If they ever get too high for comfort, you can go down to the lower 35-year amortization payment until rates decrease again.

2. Does a variable rate mortgage fit my risk profile?

Once you have decided you can afford a variable rate mortgage, the next thing to assess is whether a variable rate mortgage fits your personality, lifestyle and comfort zone. If your’re the type of person that can’t sleep at night knowing that your rate may change by 0.25%, then a variable rate mortgage may not be the best option for you.

3. What type of variable rate mortgage should I choose?

There are three main factors to consider when choosing a variable rate mortgage:

  1. PAYMENT FREQUENCY - Make sure you are aware of the options available before deciding. Some lenders may not allow certain variations of payment frequency (i.e. accelerated biweekly or weekly payments).
  2. RATE CHANGES - Some lenders change their variable rates in line with the Bank of Canada - eight times per year - while others adjust them quarterly.
  3. CONVERSION TO FIXED RATE - Does the lender allow the mortgage to be converted to a fixed rate mortgage at any time? If so, what rate are you guaranteed on conversion - the best-discounted rate or the posted rate?