ASK THE MONEY LADY: A fixed or variable mortgage rate depends on your financial situation

Dear Money Lady Readers: Are you worried about rising mortgage rates? Let’s discuss the differences in choosing a fixed or variable mortgage rate.

Many young Canadians renewing their mortgages today may never have seen rates above five per cent and the dilemma of choosing a variable or fixed loan is sometimes quite confusing.

First, let’s be clear, variable rates and fixed lending rates don’t go together.

Fixed rates are based on what banks have to pay to borrow funds and then offer them to consumers in the form of loans and mortgages. You see, although there are many people who have money saved, most have invested it in the stock market, not in bank accounts, and banks need access to liquidity. With less Canadian cash available, financial institutions borrow funds abroad from large lenders.

This has been common practice for decades and is a major factor in determining the loan rate the consumer will pay on a new fixed rate loan or mortgage.

Canadian banks fluctuate the fixed rates offered at retail based on their own cost of borrowing, which is a combination of their profit margin and the costs necessary to cover lending spreads on funds borrowed abroad. This is the reason why fixed rates fluctuate so often. This is also why rates are locked in for a term, so that money can be secured and banks can rely on a guaranteed rate of return over a controlled period of time – for example, a fixed term of five years.

The other advantage of this operation is that credit institutions can then pool their mortgages or loans into REITs to sell them on the market and remove them from their books. This is also part of the reason the penalties are so high, to keep you in the product for the duration.

Even if you think your loan is still with your financial institution, it isn’t in the background. Canadian banks have a very sophisticated system for removing money from their books and generating profits for their investors to mitigate the risk of bad debts.

Variable rates

Variable rates are different. They are based on the Bank of Canada’s prime rate, which does not change as quickly as fixed rates (usually only four times a year).

If you choose an adjustable rate loan or mortgage, you now float with the prime rate, either a percentage above or below the Canadian prime rate.

The advantages of an adjustable rate mortgage are that you can choose to lock in your rate at any time and, if you were to break it, the penalty is simplistic, usually just the cost of three months interest.

The fixed penalties are much higher with a much more complicated calculation (combination of lifespan/renewal period/discount offered, plus rate differential).

Variable rates, on the other hand, are a true pay-for-what-you-owe product and one that I personally prefer because interest is calculated on the outstanding balance each month in a very simplistic and much more transparent way than a fixed rate. ready. Fixed rate mortgages have a locked-in rate and term and therefore calculate interest on a semi-annual basis. This allows lenders to ensure that all payments are pre-arranged and pre-loaded with interest based on the payment selection you have chosen.

Please believe me when I tell you that mortgages are the biggest money-making machines for all lenders, regardless of rates. I’ve been a lender for over 30 years and can honestly say that variable rate and fixed rate mortgages have their pros and cons.

For a first-time buyer starting out with unknown expenses, having the guarantee of a fixed mortgage payment is the best way to budget for new financial expenses. If, on the other hand, you’re a seasoned mortgage consumer or someone with a larger loan, you might want to go with a variable rate to speed up your payments, provide more flexibility, and overall pay less. of interests.

The best product is a collateral charge, which by design is not a mortgage at all. It is an estate planning tool that has been used for decades by clients who want access to the equity in their property up to 100% loan-to-value with no restrictions on use or duration.

This product is fully open, with no term or renewal, and for the right kind of customer, it’s complete freedom. Therefore, once you get it, whether you use it or not, you can keep it long term for available credit, should you need it in the future.

I talk more about the benefits of collateral charges and mortgages on my YouTube channel: Ask the Money Lady.

If you are over 40 and a homeowner, regardless of your debt situation, you should have a collateral charge on all of your properties (house, rentals, or cottage).

Good luck and best wishes.


Written by Christine Ibbotson, Canadian financial writer, radio host and YouTuber. For more advice, Google Ask the Money Lady.

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