Are you a first-time homebuyer? Congratulations!
Whether you're new to the housing market or already own a home, you must understand the language and details relevant to your mortgage. Knowing the differences between a fixed-rate mortgage and a variable-rate mortgage is crucial in selecting the correct mortgage for your home-buying needs.
Learning terminology and understanding each concept is essential before selecting your mortgage. A home is a significant investment, so you'll need to understand interest rates, payment terms, and other factors. The type of mortgage you choose determines how you'll pay and more.
We understand the confusion many new homebuyers have. In this article, we'll break down what a fixed-rate mortgage is, the different types of fixed-rate mortgages, how they work, their benefits and disadvantages, how to determine whether a fixed-rate mortgage is right for you, and other essential topics.
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a type of home loan that features a single, fixed interest rate throughout the entire length of payment. Interest rates won't change despite market changes and other impacts. Monthly payments also remain the same.
Homebuyers looking to save money and budget monthly expenses often choose fixed-rate mortgages for their consistency. While you may save more on variable interest rates, these rates can change drastically, resulting in significantly higher payments that fluctuate with market changes.
More first-time homeowners decide to get a fixed-rate mortgage to save on interest rate changes. There are no financial surprises with these mortgages as with variable-rate options. You may also choose this type of mortgage if you want to predict the payment amounts for the entire amortization period, which is the total time it takes you to pay off the loan.
Homebuyers with a fixed-rate mortgage get a rate based on their credit score and other factors, including discount qualifications, self-employment status, your mortgage's term, and more.
Types of Fixed-Rate Mortgages
While your goal should be to pay off your mortgage on schedule, paying off your mortgage too soon can incur penalties, depending on what type of mortgage you have.
There are three types of fixed-rate mortgages and each determines how you'll pay:
- A closed, fixed-rate mortgage is a mortgage that requires paying on a specific schedule. If you pay the loan off before the end of the term, you receive a penalty.
- An open, fixed-rate mortgage is a home loan featuring no penalties for paying off your mortgage before the term's end date. You'll face no penalties, and the mortgage's flexibility means you can increase payments over time.
- A convertible mortgage begins as an open mortgage with a variable or fixed interest rate. You can choose to convert the mortgage into a closed mortgage without facing financial charges. Some convertible mortgages have time limits regarding when you can convert.
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A fixed-rate mortgage maintains the same interest rate throughout your loan repayment period. Interest won't increase with your home's age or real estate market prices. Instead, you'll pay the same interest rate no matter how much is left on your mortgage.
Loan providers offer fixed-rate options for those looking to save money and have a predictable, manageable way to repay their mortgages. While fixed-rate mortgage interest rates won't usually go up, price increases aren't impossible.
Fixed-rate mortgages often increase when bond rates grow. Determining when these rates may decrease can help you find the best interest rate. In Canada, the annual return rate of mortgage bonds directly correlates with mortgage rates rising.
Mortgage bonds are similar to loans because they provide lenders with debt repayments and interest. These bonds work differently than mortgage loans as they act as securities. After receiving a bond, your financial institution provides the loan.
Benefits of a Fixed-Rate Mortgage
Whether it's your first time purchasing a home or you have significant experience, a fixed-rate mortgage offers many benefits to homebuyers. Predictable payments, full amortization, and long-term pay periods are considerably easier with a fixed-rate mortgage versus a variable option.
Because fixed-rate mortgage costs stay the same regardless of other factors, you can always expect to pay the same amount. Principal costs and interest doesn't increase or decrease with time. This makes budgeting for other expenses easier and helps you track future costs.
Another benefit of a fixed-rate mortgage is its amortization period with predictable payments. An amortization schedule helps determine when your payments are due and how much money you'll need to send the loan provider.
Knowing your principal payment amount and the amortization period, you can calculate how much you could pay each time to either pay off your open mortgage early or budget for each payment properly. By understanding both benefits, you can save money, pay your mortgage without missed payments or confusion, and potentially pay off your loan faster.
Disadvantages of a Fixed-Rate Mortgage
There are far fewer disadvantages of having a fixed-rate mortgage. The initial cost is the primary downside. Between high costs for more security and the remaining possibility of price changes, it's crucial to be aware of the potential price fluctuations.
Fixed-rate home loans have higher introductory rates than variable-rate loans. You pay more upfront for a single rate that locks in for the duration of your loan period.
While fixed-rate mortgages are popular for their predictability and little fluctuation, they can still change. Mortgage bonds are the primary cause. Other causes include homeowner's insurance premiums and government taxes.
Although changes in your property taxes or homeowner's insurance plan costs can affect your mortgage, these increases are not something your loan provider can determine. If insurance premiums increase or taxes change, your provider will notify you and pay these outstanding balances on your behalf. Otherwise, you may need to prepare for higher rates.
Fixed-Rate Mortgage Amortization Terms
The amortization period is the length of time you'll take to pay off your mortgage. A fixed-rate mortgage features a lengthy repayment term between 15 and 30 years. In many cases, longer amortization periods incur higher interest rates.
Each term has its pros and cons, depending on your financial capabilities. A 30-year fixed-rate mortgage is the longest option, allowing for low monthly payments that make it easy to budget for other monthly expenses. Despite the higher overall rate, lengthier terms are often more manageable for those on a budget.
A 15-year fixed-rate term helps you save significantly more on interest and enjoy a lower overall rate than a 30-year term. Shorter terms lead to fewer interest costs. However, these shorter periods incur higher principal payments to compensate for less repayment time.
While they're not as common, 20-year, fixed-rate amortization periods are another option that allows you to save interest and pay a reasonable principal amount. Not all loan providers offer this loan duration, but you can find one in your province with mortgage rate finders.
Fixed-Rate Mortgage Trends and Costs
Those looking to take out a mortgage for a new home may notice that fixed-rate mortgage options have little cost shifting past increased mortgage bond trends and taxation or insurance changes. While mortgage providers compete with one another for new borrowers, fixed-rate options offer significant stability regarding expenses.
Posted rates vary by province and may change regularly. These amounts advertise possible loan repayment models on loan provider websites.
Typically, the longer your amortization period, the lower the principal payment, but overall loan values and interest costs can increase these expenses significantly. You may still have high payments despite an extended amortization period.
Some homebuyers have tight budgets, making it difficult to find a loan that works for them. You may be able to get a discounted rate upon asking and save considerably.
Difference Between Fixed-Rate and Variable-Rate Mortgage
A fixed-rate mortgage and a variable-rate mortgage work similarly but offer different benefits and cost options. Depending on your financial capabilities, a variable-rate mortgage might be ideal.
Fixed and variable-rate mortgages vary in interest costs throughout the amortization term. While fixed-rate mortgage interest remains the same throughout the term, variable-rate mortgages have a changing interest rate, meaning you could pay more or less on your mortgage.
Variable-rate mortgages, also called adjustable-rate mortgages, come with higher risk. The unpredictability means you may pay significantly more during certain months. Despite variable-rate mortgages being cheaper upfront, the evolving interest rates can increase charges surpassing the initial cost savings.
Fixed-rate mortgages are better for long-term residents. If you don't plan to stay in your house for the next 15 to 30 years, consider a variable-rate mortgage to enjoy an initial fixed rate and sell your home before the rate adjusts to a variable model.
Determining If a Fixed-Rate Mortgage Is Right for You
A fixed-rate mortgage isn't right for everyone. You may not be eligible for a fixed-rate mortgage if your credit score is too low. After getting mortgage pre-approval, it's best to consider the options regarding your loan repayment.
Determining your financial needs begins after finding a house. From there, you'll need to consider your monthly expenses, financial capabilities, and the overall cost of the home.
If you want to go a long time without notice of payment obligations, a lump sum payment option with fixed-rate interest may be best for you. Alternatively, consider a variable-rate repayment plan and convert to a fixed-rate option when interest rates drop.
If you don't want to track interest rates throughout the mortgage term, a fixed-rate option may be best. First-time homebuyers find fixed-interest options more manageable than their variable counterparts.
Fixed-Rate Mortgage FAQs
Government of Canada bond rates are the primary driving factor in what causes fixed mortgage rates to change. As an example, a five-year mortgage rate varies along with a five-year Canadian bond rate. The stock market is influenced by inflation (or the forecast of inflation) which cause bond rates to fluctuate.
If a rate decrease is expected and you have a variable-rate mortgage, it's actually wise to switch to a fixed mortgage as long as falls within the set timeframe to do so. You may also opt for an early mortgage renewal penalty free provided that the maturity person is within the following 6 months.
Rate increases can have an immediate impact on your mortgage payments if you have a variable-rate mortgage. In this case consider converting to a fixed-rate mortgage. A fixed-rate mortgage is much easier to budget for financially.
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Are you still curious about the details of a fixed-rate mortgage? At Insurdinary, we are Canada's top insurance and mortgage comparison resource. We understand your confusion behind fixed-rate mortgages and strive to help homebuyers like you find the best rates.
Our website compares thousands of the top mortgage loans and providers based on your location and financial needs. No matter your province or the cost of the home you'd like to buy, we can help find a loan provider willing to work with you.
We work with the top mortgage insurance providers and fixed-rate mortgage loan facilitators in Canada. Whether you need to refinance your first home to afford a second, or it's your first time purchasing a house, we'll help you locate affordable interest rates.
