HOW TO CHOOSE BETWEEN VARIABLE AND FIXED RATE?

What is a mortgage?

A mortgage is generally a long-term loan, which involves regular payments by the borrower over an extended period of time. This is the time it takes to pay off the mortgage in full.

Usually, people will take a 25-year amortization on their first mortgage. In some cases, the amortization can go up to 30 years depending on the financial institution and the borrower's profile.

The amortization period is divided into terms that can be short or medium term. The term is the current contract that defines the terms and interest rate of the mortgage contract. The interest rate can be fixed or variable. 

Choosing a fixed or variable rate?

Generally speaking, fixed-rate mortgages offer greater financial security and stability because the interest rate will not increase over the term. However, variable rate mortgages can be more advantageous over the long term if overall interest rates remain low.

When you are choosing the type of mortgage that is right for you, you need to consider your risk tolerance and your overall financial situation. If you have a good risk tolerance and can absorb a potential increase in monthly payments, a variable rate mortgage may be a good option. If not, a fixed rate mortgage will likely be a better option.

Statistically, borrowers who choose a variable rate pay less interest over the life of their mortgage. In other words, historically, no matter how high the variable rate goes, over a 20 or 25 year term, variable rate borrowers generally pay less interest over the life of their mortgage.

In the short term, however, this is more viable for those with a moderately high-risk tolerance who will sleep well at night even if their mortgage rate is 6%! This is only true if their budget allows for payment increases. For employees and salaried people, income is often less elastic than one would like.

In this case, a fixed rate on a shorter term will be the best option in order to have the possibility of re-evaluating the situation at the renewal of the term. Self-employed people, people who own companies or any other person with a significant growing income can more easily afford to increase their monthly payments by several hundred dollars.

Fixed or variable rate: Which strategy to adopt in 2023?

Currently, the variable interest rate is higher than the fixed rate, and therefore the short term rates are higher than the long term rates. This is called an inverted curve. This situation implies that the payment terms of both short and long term mortgages are being challenged.

What will be the new strategy for reducing the short and long term interest costs on your mortgage? That's the question many mortgage borrowers are asking themselves

You guessed it, it depends. If you can afford higher payments and can handle rate increases, the variable rate is very attractive right now. Since fixed rates are lower than variable rates, you may be able to transfer from variable to fixed when the rate reaches the desired or comfortable rate for the remainder of the term. Generally, there are no penalties or fees associated with transferring from variable to fixed rate when it is with the same lender.

In short, the strategy depends on your financial situation and the economic context. Generally speaking, in a context of falling fixed rates and if the family budget allows it, the variable rate is a good choice. For a first-time buyer, whose debt levels are maximized and whose income is static, the fixed rate could be a better option.

In all cases, do not hesitate to ask a mortgage broker for an analysis of your financial situation. He or she will be able to guide you in your best interest.