Why Would You Choose A Fixed Mortgage Rate?

When it comes down to buy a property, there are plenty of mortgage products and each of them has several characteristics. One of the most important is the interest rate. This post is about the pros and cons of a fixed mortgage rate. We will also give you examples when a fixed mortgage rate is the best option.

What does a fixed mortgage rate means?

A mortgage comes with an amortization and a term. The amortization is the time you will take to pay off your mortgage completely. For example, you can pay it down over 20, 25, 30 years. The mortgage term, is the time where you sign an agreement with your financial institution. You can usually have term between 1 year and 5 years. Longer term and amortization do exists but banks will usually charge a premium if you ask for a longer term.

A fixed rate is an interest rate that is predetermined for the time of your term. If you take a classical 5 year fixed rate, you are therefore assured that your mortgage rate won’t fluctuate during that specific period. Usually, the longer the term, the higher the interest rate.

Who is it for?

Historically, it is important to know that variable rate are always offering a lower interest rate and fixed rate mortgages. However, if you have a tight budget and can’t afford seeing your mortgage payment going up by $100 a month, you are definitely better off with this type of interest rate.

Therefore, fixed mortgage rates are for young family with a tight budget or if you are buying a rental property and you don’t want to bother about calculating about your investment cash flow. In addition to that, interest charges are usually tax deductible on rental properties (interest charges on regular mortgage is also tax deductible in the States but not in Canada).

Fixed rate mortgages are definitely offering a good piece of mind, however, you must be aware that there is a premium for this “insurance” that your payment will be stable over a few years.

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