Who is the right customer for a fixed-rate mortgage?

The right customer for fixed

Fixed-rate mortgages are like the Kraft Dinner of home loans. When you’re in a pinch, they are there to provide comfort and reliability. This type of mortgage is where payments remain consistent until you completely pay the mortgage off. It is also fully amortizing, which means that you will fully pay off the principal payments and interest that you owe to your lender when the loan ends. Due to their affordability and predictability, fixed-rate loans have helped stabilize home borrowing, as well as protect families from being priced out of their neighbourhoods. There is a lot that goes into choosing a fixed-rate mortgage, such as factors that will affect the price of the mortgage, as well as advantages and disadvantages.

Some factors that affect the rates of a fixed-rate mortgage include the size of the loan as well as the term of the mortgage.  Mortgages that are smaller or larger than an ordinary mortgage tend to be a little more expensive. Lenders will also look at a borrower’s credit score. They associate a higher credit score with lower risk. For more information on credit scores visit our previous blog post! A fixed-rate mortgage’s term will also affect a lender’s perception of risk. A longer-term loan will have a higher interest rate compared to a shorter-term loan.

What are the benefits?

Having a fixed-rate mortgage has many benefits to borrowers and is the perfect loan for the Nervous Nelly. This mortgage is predictable and safe. The payments on a fixed-rate mortgage are unchanging, meaning that the mortgage rate remains consistent if the economy were to slump, and they are typically lower by stretching it out over 30 years. This allows for borrowers the qualify for bigger loans and makes payments more affordable. Borrowers also have more flexibility in paying off the loan faster by adding to their monthly payment or by making extra payments. While Canadians can’t receive a tax deduction on the mortgage interest as in the United States, there are strategies for making the loan more affordable. More information about making your mortgage more affordable can be found here.

What are the disadvantages?

Even though opting for a fixed-rate mortgage can provide borrowers with comfort and reliability, there are some drawbacks that may not make it ideal for all borrowers. A fixed-rate mortgage is not flexible like a variable-rate mortgage. When interest rates are dropping, fixed-rate borrowers can’t enjoy the savings like the variable-rate borrowers unless they refinance. Also, a long-term fixed-rate loan will cost a significant amount more in interest. The risk of lenders not getting repaid is spread over a longer period of time; they tend to charge higher rates compared to a variable-rate loan.

While a fixed-rate mortgage has its disadvantages, there are ways to accelerate your savings. By asking your lender for your amortization schedule, you can see the amount that you will be paying each month to fully own the home in 15, 20, or 30 years. Having a longer-term loan will provide borrowers with lower monthly costs and allows them to provide extra monthly payments to help reduce the amount of time to pay off. A fixed-rate mortgage also gives borrowers the “sleep-well-at-night” advantage. No matter what happens, the mortgage payments will always stay the same.

If you want to sleep well at night, come and visit us at Clinton Wilkins Mortgage Team.