What are variable and fixed-rate mortgages?

• Fixed mortgage is a fixed interest rate for a set term with fixed payments.
• Variable-rate mortgage fluctuates with the Prime Rate. It can mean fluctuations in your payment or the interest portion on a set payment plan.

Historical Trends

In the last ten years, the prime rate has gone from 2.50% to 3.95% and now sits at 3.20% as of May 2022. Due to recent events (e.g. covid pandemic), the rate has seen a downturn providing benefits to new borrowers.

The Benefits

People who qualify for variable-rate mortgages can take advantage of lower rates. If you have flexible payments, you may see your monthly payment drop following decreases in the prime rate.

If you have a fixed payment plan, you pay more on your principal loan each month if the rate drops. The extra money towards the principal can make a substantial difference over a 25 or 30-year mortgage.

Some people may not prefer the potential fluctuations with a variable rate mortgage. Or, they may not have wiggle room in their budget for any changes in mortgage payments. Thus, a fixed-rate mortgage would be the best choice for these clients.

Case Study

Michelle and Josh have a $400,000 mortgage with a variable-rate at Prime minus 0.5 (giving us 2.70%) with set payments at $1,831.95 monthly. The mortgage matures in the next two years. They are considering locking in for a new five-year fixed-rate at 4.59%. The new payments would be $2,233.95 monthly. Michelle and Josh are also considering moving to a bigger home in the next couple of years.

Michelle and Josh do not have to feel pressure to lock in today. It is more beneficial to keep the remaining variable rate for two years. If they set the payments based on 4.59% or $2,233.95 monthly, they would pay an extra $402 on their mortgage per month. In two years, their savings on interest is $9,648 less than staying at the fixed rate.

Another benefit to variable-rate mortgages is a lower penalty. If Michelle and Josh choose to sell before the term ends, the penalty is typically only three months of interest. As opposed to much heavier interest rate differential (IRD) calculations used to determine fixed-rate mortgage penalties.

Is your mortgage maturing soon and not sure what to do? I can provide tips for your existing mortgage and assess the right strategy for your money. Let’s chat today.