The Pros and Cons of Fixed and Variable Mortgages

Let’s begin with the prime rate. Most people are familiar with it by now, as it has been widely discussed over the past few years. The prime rate, or prime lending rate, is the annual interest rate set by the Bank of Canada. It’s used as a benchmark for variable-rate loans and lines of credit, including variable-rate mortgages. The Canadian economy influences this rate and can change over time.

Now, let’s move on to open mortgages. An open mortgage, or open-term mortgage, is a flexible option for those who plan to pay off their mortgage sooner. With an open mortgage, you can repay the loan fully or partially at any time without incurring prepayment penalties. You can also convert it to a mortgage with different terms without penalty. However, it’s worth noting that open mortgages usually have higher interest rates than closed mortgages.

On the other hand, closed mortgages are a popular choice for those who don’t anticipate paying off their mortgage in the short term. Closed-term mortgages generally offer lower interest rates than open mortgages, which can help borrowers save on interest and pay off their mortgage sooner. Closed mortgages can be fixed or variable, but there are restrictions on how much principal can be prepaid each year.

Fixed vs. Variable Rates

Now, let’s look at fixed versus variable mortgage rates. With a fixed mortgage rate, your monthly payments remain the same for the entire mortgage term, which protects you from interest rate fluctuations. Variable mortgage rates, however, are tied to the current Canadian prime rate, meaning your monthly payment amount stays the same, but the portion going toward the principal will adjust. If rates increase, a more significant portion of the payment goes toward interest, which can extend the amortization period.

Adjustable-Rate Mortgages (ARM)  

In contrast, an adjustable-rate mortgage (ARM) has payments that change along with the interest rate to maintain the original amortization schedule. If rates go up, the interest rate and payment amount adjust, helping you stay on track with the initial schedule.

In conclusion, understanding mortgage options—such as the prime rate, open and closed mortgages, and the differences between fixed, variable, and adjustable rates—is critical to making well-informed decisions about your mortgage. By familiarizing yourself with these concepts, you can select the mortgage option that best fits your financial goals and needs.