A fixed mortgage is a very traditional mortgage loan, with the primary feature being a rate which remains constant throughout the specified mortgage term. This type of a mortgage product has been designed for more conservative borrowers, seeking to be shielded from the fluctuations of a market-tied mortgage rate.
Approximately 70% of borrowers in Canada choose a fixed mortgage over variable rates, with fixed rate mortgage terms typically available between one and ten years. The primary benefit of a fixed mortgage is the predictability of a static mortgage payment, regardless of the state of the economy at any given point. This security doesn’t come without a price, however. Fixed rate mortgages are usually more expensive by comparison to adjustable rate mortgages (LINK). Due to the inherent interest rate risk, long-term fixed rate loans will tend to be at a higher interest rate than short-term loans.
Historically, over the past thirty years, the variable rate mortgage (link) has been proven to be more cost effective except when evaluated against a few periods of high-inflation. When fixed mortgage interest rates are low, often borrowers consider locking in for longer terms than they would otherwise consider. At the bottom of the “rate cycle” (LINK), some borrowers will be more inclined to lock in on a 10-year rate vs. periods of high interest rates, where consumers often opt for short-term loans.
Ultimately, the decision between weather to select a variable interest rate or a fixed rate mortgage should be decided based on a number of factors, including but not limited to: excess disposable income, risk tolerance, market conditions, and ultimately mortgage qualification.
TIP: Often borrowers with slightly worse credit, or less disposable income relative to their mortgage and debt obligations, will find it easier to qualify for a fixed rate mortgage. This is as a result of the reduced risk factor of market fluctuations raising mortgage payments at a potential later date.
TIP: Often a borrower may squeeze out a few extra dollars on a home purchase (LINK) or mortgage refinance (LINK) as often variable rate mortgages are qualified at a higher rate.
Most fixed mortgages carry prepayment privileges that allow one to increase their monthly or bi-weekly payments by anywhere from 5% up to double, in addition often to year-end or anniversary lump-sum payment privileges.
Some types of mortgage products are typically unavailable on a fixed rate basis, such as open mortgages (LINK) and lines of credit (LINK) as a result of their variable balances and unpredictable repayment terms. As such, it becomes increasingly difficult for the lenders to accept the risk of rising interest rates on such products. That being said, some mortgage broker lenders do provide open mortgages and secured lines of credit on a fixed rate basis in contrast to the major Canadian banks.
Ultimately, in a world of confusing financial terminology and conflicting research and expert opinions, it is important to understand the fundamental advantages and disadvantages of a fixed rate mortgage product.
Contact Canada’s mortgage experts today for a complimentary consultation on flexible and affordable fixed rate mortgages. Call Us Today at 1 888 465-1432.