Variable or Fixed in Today’s Market?
As if deciding to have a fixed rate or a variable rate on your mortgage loan is not stressful already, let’s add a pandemic into the mix, which only makes this decision more complicated for Calgary homebuyers.
Before we dive into that subject, we will explain the difference between a fixed rate and a variable rate…
Fixed Interest Rates
Fixed interest rates stay the same during the entirety of your loan’s term, (typically 5 years). This means, for the term of the loan, your mortgage payments will stay the same. There will be no changes to your monthly cash flow.
Variable Interest Rates
Variable rates, also known as “floating” rates; change over time in response to changes to the Government of Canada’s overnight lending rate. This lending rate is what affects “Bank Prime,” and can change up to 10 times per year. It’s important to note that Bank Prime can go years without changing their overnight lending rate and has changed that rate only 12 times in the last 10 years, (three of the 12 changes were made at the beginning of the pandemic in 2021).
Variable rates, in general, tend to have lower rates than fixed. In the last 40 years, Canadians that have chosen to go with a variable rate have paid net, less interest than Canadians that have chosen a fixed rate mortgage.
Variable rate holders have to expect that their monthly payment could change. Payments can increase or decrease if there is a change to the lenders, “Bank Prime.”
Condos vs. Single Family Homes
When you’re considering a condo, not that each $100 in required condo fees reduces borrowing power by about $10,000. Simply put, your available income to pay the mortgage is reduced by condo fees. The more significant the condo fee, the bigger the impact. Some clients are searching for condos, so this is great. Other clients are right on the cusp of purchasing a condo or a duplex. In Calgary, an example would be a purchase price of $300,000. If the client qualifies for a $300,000 purchase price, but the unit requires monthly condo fees of $300 per month, the borrowing power of the client is reduced to $270,000. If the client opts for a duplex, without condo fees, their purchasing power would remain at $300,000.
Today’s Current Interest Rates
At the beginning of the Pandemic, fixed rates grew in popularity due in incredibly competitive pricing. In late 2020, Fixed rates were priced even lower than variable rates and many believed that the current variable rates were unable to go any lower given the Bank of Canada’s overnight rate, presently sitting at 0.25%.
That being said, in the Month of March (March 2021), Bond rates have pushed fixed rate mortgages back up to 2%. On the back of the changes to fixed rates, Lenders have again decreased their variable rate differentials placing variable rates under 1.50%.
As we rolling into the hotter fall market, Variable rates are again an important consideration for Calgarian borrowers. Whenever you’re evaluating options between variable and fixed, it’s important to get all of the facts from an experienced mortgage professional. This information will help you make the most educated decision for your personal financial situation.
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