Choosing a Variable or Fixed Mortgage?
When deciding between a variable or fixed-rate mortgage, there are several factors to consider. Let’s walk through them to help determine the best option for your situation.
1.Income: First, let’s look at your income. Is your job secure? Do you expect your income to grow over time? If you have a stable and growing income, you may be more comfortable with the flexibility of a variable-rate mortgage. However, if your income is less certain or you have concerns about stability, a fixed-rate mortgage may provide peace of mind by locking in predictable payments. A great example here would be a young couple who plans to start a family. A drop in income during parental leave should be factored in.
2. Debt: Next, we should assess your debt-to-income ratio. If your debt load is manageable and relatively low compared to your income, you may be in a good position to take on the potential fluctuations in a variable-rate mortgage. But if you're carrying a higher proportion of debt, a fixed-rate mortgage could help you avoid the uncertainty that comes with interest rate changes.
3. Equity: Do you have enough equity built into your home? If so, you might be able to refinance easily if things change in the future. If you have a significant amount of equity, you might be more comfortable taking on a variable rate, since you can potentially refinance in case of any financial challenges. If equity is tight, however, a fixed rate could provide more stability.
4. Assets: Let’s talk about your assets. Do you have enough liquid assets to fall back on in case of an emergency or unexpected financial strain? If you have a solid emergency fund or other liquid assets, a variable-rate mortgage may work well, as you’ll have a cushion to ride out any financial storms. Without that cushion, a fixed-rate mortgage might offer better security.
5. Sensitivity to Risk: How comfortable are you with taking on risk? Can you handle a 200-300 basis point rate increase over 18+ months without it causing financial stress? If you’re relying on academic research or predictions that rates may drop or stay low, a variable-rate mortgage might work for you. But if you’d prefer more certainty and the ability to predict your payments without surprises, a fixed-rate option might be better. If you see yourself on your phone consistently worried about the Bank of Canada rate announcements, then you may be better off locking in a rate to give you peace of mind.
Ultimately, it depends on your personal comfort level with potential rate changes, the stability of your income, and your ability to weather unexpected events. I’m here to help guide you through this and answer any further questions. Let's find the best fit for you!