For 2022, which mortgage is better? fixed rate or variable rate?
So the big decision to make is do we go for a fixed or variable rate? The short answer is, it depends.
The difference is that a fixed-rate mortgage keeps your payments the same for the duration of the term. Meanwhile, a variable-rate mortgage will fluctuate throughout the term and is based on the Bank of Canada’s prime rates.
How exactly the prime rate gets calculated becomes a bit more technical (https://www.creditcanada.com/blog/fixed-or-variable-rate-mortgages-whats-your-cup-of-tea), and certainly worth investigating, but it’s essentially the interest rates on loan that bank lenders offer their best customers. Now if the prime rate goes up, then your mortgage payment goes up as well, and vice versa when it goes down.
The main benefit for a fixed rate is that you know exactly what you sign up for, hence “fixed.” For people who want that stability and predictability to plan out their lives, then a fixed rate offers some peace of mind. You can go for 2-year, 3-year or 5-year terms to lock in that stability. Generally the shorter the term, the cheaper the rate. Just keep in mind that you can’t break your term if a better offer comes along during this time. So, for better or for worse, you’re locked in.
On the flipside, a variable-rate mortgage generally offers a much lower rate than fixed and could be less expensive over the term duration. But, the risk is the unpredictability and uncertainly of the prime rate fluctuating. While this could be the perfect time to take advantage of a lower variable rate, you’re running the risk that something could change on a whim. (1)
Just keep in mind what you can afford because this is the biggest purchase of your life as a first time home buyer. After purchase, there are still closing fees, lawyers, and getting your place furnished.