Fixed vs Variable Mortgage – What to do?

By , On , In General

Recently I asked a Mortgage Broker about fixed vs variable and she sent me back an email… I thought it was a simple breakdown of what to consider, so I am sharing with all of you. Enjoy!

This article discusses variable vs fixed. mortgage rates and the pros and cons with each.

Something I always tell my clients is there are 2 sides to variable vs fixed rate products. I like to refer to it as 2 bets. One is the interest expense and the other is the penalty exposure. People tend to only think of the interest expense and don’t consider the penalty costs associated with each of they were to break their mortgage.

Interest expense- Initially when you get a mortgage variable rates are lower than fixed but as you know they can increase/decrease over the 5 year term (most common mortgage term) and therefore there is a risk as the rate is not locked in and could go higher.

Fixed rates are always priced higher but give people the peace of mind that the rate/payment will remain the same and will not increase over the 5 year term. Statistically however fixed rates over the long term have shown to cost more in interest than variable rate mortgages do.

The other side that people don’t often think about is the penalty that comes if you break your mortgage before the 5 year term. Most people don’t plan to break their mortgage but the reality is 70% of people end up breaking their mortgage before the 5 year term is up…

A variable rate mortgage comes with a 3 month interest penalty if people end up refinancing/selling/upgrading/downgrading and pay off their mortgage before the term is up.

A rate mortgage however comes with an IRD penalty, which is a calculation based on a percentage of the mortgage balance. These penalties can be really high and are typically 7-10 times the cost of a variable rate penalty depending on when you break the term.

For an average mortgage of say $350000 a variable rate mortgage may have a prepayment penalty of $2200 vs a fixed rate mortgage, the penalty could be as much as $20,000.  *please note that these are approx figures and not exact amounts.

This means there are 2 sides to consider when deciding on whether to go fixed or variable. The interest expense vs penalty exposure and clients need to consider both and their plans before deciding on whether to go variable or fixed.

I always ensure my clients are well informed so they can make a decision that suits them the best.  I’d be happy to answer any mortgage questions that people may have.

Chelsea Shaddock, BComm
Mortgage Specialist
Bank of Montreal Financial Group
294 Bernard Ave 
Kelowna BC V1Y 6N4
Cell: 1 778 215 1104


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