If you're like most Albertans you prefer the fixed-rate mortgage. This is according to a recent survey conducted by CIBC showing that most residents in the province would select a mortgage with a fixed-rate over a variable rate.
What Are the Pros and Cons of Variable-Rate and Fixed-Rate Mortgages?
An adjustable-rate mortgage (ARM) has fluctuating payments based on the specific terms of the mortgage and a benchmark interest rate that is chosen by the lender. This can be beneficial for home buyers, especially for those who are expecting changes in the next few years and are not looking for long-term stability and predictability. Most ARMs have a low fixed-rate period during the first few years that may be lower than current fixed rates and caps that limit the size and frequency of the adjustments to the payments. Plus, whenever interest rates that affect the index the ARM is benchmarked against fall, the payments will also drop. Some buyers can get into trouble if payments go up more than expected, and they are not prepared for the higher amount, and some ARMs come with a prepayment penalty, meaning that if the home is sold or refinanced within a certain period, additional fees are incurred. ARMs can be complicated, so understanding all the terms, rules, fees, and structures are critical for anyone considering this type of mortgage.
Fixed-rate mortgages offer borrowers a little more certainty in that the interest rate and monthly payment amount will not change over time. This is an excellent option when interest rates are low and buyers can lock in a flat rate and enjoy a smaller payment. Terms tend to be more flexible as well with repayment options of 10, 15, 20, and 30 years so borrowers can plan according to their needs and goals. On the other hand, fixed rate mortgages tend to have higher rates than ARMs, especially during the initial years of an ARM, and this can result in a higher overall payment. Plus, borrowers are locked into the mortgage and cannot enjoy periods of lower interest rates without refinancing—and all the fees and costs associated with closing a new loan.
What Amortization Period Do Albertans Prefer?
Almost half of Albertans surveyed, around 47%, would renew, refinance or get a mortgage with a fixed rate. Only 26% would opt for a variable rate. Nationally 45% of Canadians would go for a fixed-rate while 26% would choose a variable rate mortgage.
Choosing between the 2 different mortgage types is one of the first things to consider when you're looking at your mortgage options. While there are many other factors to take into account, this is going to be one of the biggest decisions that you'll need to make about the mortgage before the other variables are considered.
It's not surprising that the fixed-rate mortgages are more popular, especially now that interest rates are so low and have been for quite a while. In Alberta, 40% of those polled in the same survey said that they thought that mortgage rates would remain the same for the next few years.
When looking at a mortgage, however, it's always important to take a long-term approach to the decision. While we are enjoying the low rates rate now, it's anyone's guess where they will be in the next few years and in the future beyond. When looking at a variable rate option you'll want to pay close attention to your budget and how much of a rate swing you could comfortably handle if the rates should happen to go up in the foreseeable future.
The best thing you can do is talk to a mortgage broker to find out all of the benefits and drawbacks to both types of mortgages. The broker will go over your personal financial details and show you how one will influence your budget more than another and why one may be a better mortgage for you, taking into account both long-term and short-term influences.