Variable vs fixed: What’s the best rate in 2021?

COVID-19 has had a huge impact on mortgages and the real estate industry over the past year. Rates are at historic lows, which has made everyone rethink their mortgage options. In the past, many Canadians opted for variable rate mortgages, but is that a bad idea now? This is new territory for many people who are trying to understand their choices. If you’re looking to get a mortgage, what’s the best rate in 2021?

You might be tired of hearing this, but it depends on you. In all honesty, both variable- and fixed-rate mortgages offer advantages, and they’re both still good products. However, one will likely be better for you than the other. Think about the following to see where your situation fits in!

Comparing mortgage types in 2021

2020 and 2021 have been two years like no other when it comes to the mortgage industry. Take a moment to compare variable and fixed mortgage rates, and what they look like this year.

Variable-rate

As you probably know, a mortgage with a variable interest rate is subject to change. Variable rates are always relative to the prime rate, which currently sits at 2.45 per cent. The prime rate today is low compared to the past, but eventually it will increase again. This means that over time, variable-rate mortgages will also start to see higher interest rates.

The penalty for breaking a variable rate mortgage, however, is relatively soft right now. Breaking any mortgage term will result in penalties, but with variable-rate mortgages, that penalty is three months’ interest. Since interest rates are so low, this penalty isn’t too severe.

Fixed-rate

On the other hand, fixed-rate mortgages will maintain the same rates throughout your mortgage term. Since rates are so low right now, many people want to lock those rates in with a fixed term. You can read more about the prime rate and overnight rate here.

Fixed-rate mortgages also come with an interest rate differential (IRD). This calculates the difference between two separate interest rates – for example, your interest rate compared with the rates of today. This determines the penalties you’d have to pay for breaking a fixed rate mortgage, and these rates can be much higher than three months’ interest. It depends on what rate you locked into, but in general, it’s safe to assume your IRD would be higher than today’s interest rate. This means your penalty payment would probably be higher with a fixed-rate mortgage than a variable-rate.

Consider your situation

So, is there a best rate in 2021? There probably is for you, but your situation is likely different from someone else’s. It’s important to understand what you want to do with your home, and to evaluate your goals as a homeowner. These mortgages are designed for different people who have different purposes for their homes.

There’s a lot of opportunity in fixed-rate mortgages right now. Locking into these low rates can be a great idea if you plan on staying in your home long-term. If you plan on buying and selling the same home within a couple of years, though, don’t lock into a five-year fixed-rate mortgage. Even though the rates are great, they won’t be worth the big penalty you’d have to pay for breaking your terms. 

Variable-rate mortgages are more unpredictable because of their ability to change. However, they still suit many people in 2021. These mortgages are best for people who aren’t certain how long they might stay in their home, because it’s less painful to break this type of mortgage. Variable-rate mortgages also often come with different features like prepayment opportunities, and they can be more flexible.

Speak to an unbiased mortgage broker

The type of mortgage you choose should reflect your plans as a home owner. If you prefer rigid payment routines, predictability, and long-term commitment, a fixed-rate mortgage is a perfect option in 2021. If you favour a more flexible arrangement with the freedom to move, you might want to consider a variable-rate mortgage. The most important thing you need to do, though, is speak to a mortgage professional.

There are so many factors to consider when choosing your mortgage type in 2021. An unbiased broker will help you determine your unique goals and situation, and will guide you to the right product. Remember, mortgage brokers always work with your best interests in mind.

If you have questions about which type of mortgage is best for you this year, get in touch with us at Clinton Wilkins Mortgage Team! You can reach us at (902) 482-2770 or contact us here.