While buying a new mortgage, you would have to choose between the fixed and variable mortgage rates to shape your payment plan. However, you must closely observe and evaluate both the rates before reaching the final decision.
Fixed Rate Mortgage
Fixed rate mortgage is the one in which the mortgage rate remains the same throughout the mortgage period. In such a scenario, your mortgage rate will not be impacted by the on-going economic situation and prime rate.
Variable Rate Mortgage
Variable rate mortgage is the one in which the mortgage rate fluctuates with the change in on-going market rate. Just like the prime rate, the variable rate is directly influenced by the economic factors and inflation rate.
The fixed mortgage rate remains constant and only changes on the renewal of mortgage term, while the variable mortgage rate might continuously change with the market rate. As the fixed mortgage rate is unmoved, the mortgage payments also remain same each month. On the other hand, variable mortgage rate also impacts the monthly mortgage payments. These payments will either increase/decrease or remain the same with a different portion of interest amount.
In case the market rate rises, you will stay safe if you have selected a fixed mortgage rate. Oppositely, you will have to bear the raise in your variable mortgage rate with the rise in current market rate. Similarly, you cannot benefit from a dropped down market rate if you are subscribing a fixed mortgage rate. Conversely, the decline in market rate would positively affect the variable mortgage rate.
Drivers of Mortgage Rates
The current market rates for mortgages in Canada are determined by several economic factors. Among these factors, inflation is the one that plays major role in shaping the market rates. While the inflation rate is high, the Bank of Canada increases the prime rate. Likewise, the prime rate is increased when the inflation rate is low.