Variable Mortgage vs. Fixed Mortgage

Congratulations! You have been pre-approved for a mortgage and are ready to take the plunge into homeownership! But wait, nothing is ever that simple, right? Before you move in, there's a crucial decision to make: Variable or Fixed Mortgage? 

What's the difference, and which one is right for you? After all, it's a significant decision that can impact your financial well-being for years to come.

Here's a breakdown of the differences, along with their advantages and disadvantages  :

Variable Mortgage:

Imagine this as your "go-with-the-flow" option. A variable mortgage starts with lower interest rates compared to fixed mortgages, meaning lower initial monthly payments. However, that can fluctuate over the loan term based on changes in the lender's prime rate.  AKA an adjustable-rate mortgage (ARM)

Advantages:

1. Lower Initial Rates: Variable mortgages often start with lower interest rates compared to fixed mortgages, resulting in lower initial monthly payments and more cash in your pocket. 
2. Potential for Savings: If interest rates decrease over time, you benefit from lower monthly payments and save money over the long term.
3. Flexibility: Some variable mortgages offer options for prepayment or early repayment without penalty, providing flexibility and more control if you want to pay off your mortgage faster. Ask your lender first. 

Disadvantages:

1. Interest Rate Risk: The main drawback of a variable mortgage is that if interest rates rise, your monthly mortgage payments could increase. 
2. Uncertainty: Variable mortgages can be less predictable than fixed-rate mortgages since the interest rate is subject to change. This uncertainty can make budgeting and financial planning a little more tricky. 

Fixed Mortgage:

Picture this as your "Steady-Eddie" option. A fixed mortgage gives you a consistent interest rate and monthly payment throughout the loan term. It's like having a stable foundation for your financial future.

Advantages:

1. Rate Stability: With a fixed mortgage, you benefit from a consistent interest rate and monthly payment amount for the entire term of the loan. You can sleep easy knowing your mortgage payment won't change, making budgeting a breeze.
2. Protection Against Rate Increases: Fixed mortgages offer protection against rising interest rates. Even if market rates increase, there's no need to fret; whatever rate you signed up to, you're locked in. 
3. Peace of Mind: Knowing that your mortgage payment will remain unchanged provides peace of mind and financial security. 

Disadvantages:

1. Higher Initial Rates: Fixed-rate mortgages typically have higher initial interest rates compared to variable mortgages, resulting in higher initial monthly payments.
2. Limited Flexibility: Compared to variable mortgages, fixed mortgages may offer fewer options for prepayment or early repayment without penalty, limiting your ability to pay off your mortgage early. 

Which is Better in May 2024, Toronto, Canada?

Now, let's talk strategy. It's May 2024, and after a couple of years of interest rate hikes, the first quarter of the year has held steady above 5%, which is still pretty good.  There have been some rumblings of a potential drop in the next few months, but that's pure speculation for now.  The choice between variable and fixed mortgages depends on your risk tolerance and economic outlook. A variable mortgage could be for you if you're all about flexibility and don't mind a bit of uncertainty. But if stability and predictability are more your style, a fixed mortgage might be the way to go, especially if the current interest rates and your budget line up.

Ultimately, it's your call! Consider your financial goals, weigh the pros and cons, and chat with a mortgage advisor to determine the best fit for your homeownership journey.

Good Luck & Happy House Hunting! 

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