Now is a fantastic time to purchase a home. Why? Interest rates are going down like crazy right now making it perfect for Buyers and a great opportunity for Sellers looking to sell their home as well. Because of this, I thought it would be a good time to go over fixed vs. variable rates, and give you a brief overview of each and include my thoughts.
Fixed vs. variable rates, which is right for you?
With a fixed rate loan, you will be able to maximize your purchasing power and for those wanting this, this loan is a fantastic option! Let me explain how this works. Let’s say your interest rate is 2.69% on a 5 year fixed. That rate is what the mortgage will be debt serviced at on your application for how high you can purchase. If you were wanting to go lower than a five year fixed term, then the bank would have to use a “Bench Mark Rate”. This rate is currently 4.74%. That makes a big difference in how much house you can purchase.
To break it down even further, an example
Say you have an income of $50,000 with no debt and have 5% down payment saved. You could potentially qualify for a $300,000 house using a five year fixed rate of 2.69%. Now if you instead wanting to go for a rate of 2.35% on a three year fixed, your Kelowna mortgage broker would have to use 4.74% to qualify the mortgage debt. This would cause you to qualify for a purchase price of approximately $240,000. That is quite a big difference in price from the 5 year fixed.
The penalty for a fixed mortgage is most often always higher than the variable rate mortgage. When Kelowna mortgage brokers figure this, they use an Interest Rate Differential, also known as an IRD. This is calculated differently at every bank. Because of this, if you are planning to sell before your five year term is up, you may want to consider a shorter term to save you from the penalty.
When rates are low as they have been the past 10 years, the variable rate may be a great option as it has been lower than fixed terms. Kelowna mortgage brokers, as well as other banks, base this rate off of the Prime rate which is currently only 2.85%. Depending on which variable product you choose, you could even get a rate as good as 2.15% or even lower at the present moment.
When it comes to qualifying for a variable rate, it is the same as if you were to qualify for a fixed rate with a term lower than five years. With the variable, we also use a Bench Mark Rate as in the above example with the outcome of purchasing a home for $240,000 so you will still qualify for less. However, your rate over your term could be much lower, in return, making your payments lower. You must keep in mind that the rate is based off of a discount so if the Prime rate of Canada goes up, so will your variable rate. For example, the current Prime rate (2.85% – 0.7% = 2.15%) but if Prime goes up to 3% then your rate would be 2.3%.
Another benefit of the variable rate is that if you break your mortgage term by selling or refinancing, you will only pay a penalty of three months of interest. This is approximately half of your mortgage payment multiplied by three.
This is my brief take of Fixed vs. Variable. Of course there are so many possible factors and scenarios for different situations so if you have any questions at all, don’t hesitate to reach out! I would be happy to help!