With the Bank of Canada expected to lower interest rates in the latter half of 2024, variable-rate mortgages are once again in the spotlight. Should you consider one?
A variable-rate mortgage is a home loan where the interest rate changes with the prime rate set by the Bank of Canada. There are two main types:
- Adjustable-rate mortgages (ARMs): Your monthly payments vary with the interest rate. If the prime rate drops, your payments decrease; if it rises, your payments increase.
- Fixed-payment variable-rate mortgages: Your monthly payment stays the same, but the portions going towards interest and principal adjust with the prime rate. When rates rise, more of your payment goes to interest; when rates fall, more goes to principal.
With expected rate cuts, variable-rate mortgages may offer flexibility and potential savings. However, it's crucial to assess your financial situation and risk tolerance before making a decision.
Pros and Cons of Variable-Rate Mortgages
Pros:
- Flexibility to switch: You might switch to a fixed-rate mortgage during your term if interest rates don’t drop as quickly as expected, allowing you to lock in a stable rate.
- Cost savings on early prepayment: If you need to break your mortgage early, prepayment penalties on variable-rate mortgages are generally lower—often just three months’ interest compared to higher penalties for fixed-rate mortgages.
- Potential for rate drops: With the Bank of Canada likely to reduce rates, borrowers could see their interest rates decrease, leading to savings over the life of the mortgage.
Cons:
- Rate fluctuation risk: The primary risk is that your interest rate and monthly payments can increase if the prime rate goes up. While rates are unlikely to rise soon, there are no guarantees, and they could remain high longer than expected.
- Economic sensitivity: Variable rates are influenced by broader economic factors, meaning global economic shifts, political changes, or unexpected financial crises can impact your mortgage rate.
- Qualification criteria: Lenders might have stricter qualification criteria for variable-rate mortgages, requiring borrowers to demonstrate a strong financial profile to manage potential rate increases.
Is a Variable-Rate Mortgage Right for You?
Deciding on a variable-rate mortgage depends on your financial situation, risk tolerance, and future plans. If you are comfortable with potential fluctuations in your monthly payments, a variable-rate mortgage could be a smart choice. However, if you prefer the security of predictable payments, a fixed-rate mortgage might be more suitable.
Let's Make the Decision Together
Choosing the right mortgage can be daunting, especially in challenging economic times. But you don’t have to navigate this decision alone.
Reach out to me today, and I'll use my expertise to help you find the best mortgage solution tailored to your unique needs and financial goals.