Depending on the agreement with the Mortgage broker, your mortgage repayment plan could be based on fixed or variable interest rates. Fixed-rate plans are the more popular format in Canada, as most homeowners prefer the security and even pace of this mortgage type. While this is often the correct choice, fixed rates also have some downsides that could manifest at different times, so it’s really difficult to tell which type was more favourable until the end of the deal. Let’s discuss some of the most relevant advantages and disadvantages of fixed rate mortgage loans:
What you sign is what you pay
The reason why so many people opt for a fixed rate mortgage is that such loans can be precisely planned in advance. Borrowers fear the uncertainty of the open market and are more comfortable with locking in the current conditions than counting on interest rates to decrease. In this way, it is at least possible to eliminate the worst case scenario where the rates skyrocket shortly after the contract is signed and bloat the value of the loan far beyond its original figures. Fixed rates allow for better control of the family budget in the coming years and make it easier to squeeze in other large expenses.
Resistance to market shocks
When your mortgage payments are calculated with fixed rates, you don’t have to worry about future changes to the prime rate that more or less follows the current macroeconomic outlook. Homeowners with variable-rate mortgages could end up paying more than they bargained for if the financial markets take a turn for the worse, but fixed mortgages are immune to this peril. Since it is very difficult to estimate how the economy would fare over the next couple of decades, a majority of Canadians are happy to avoid speculations altogether.
No automatic benefits from rate drops
The flip side of the same coin is that mortgages with fixed APR can become more expensive than their counterparts in case that the Bank of Canada lowers the referential rate. In order to change the figure on their monthly bill, customers with mortgages would have to apply for a new loan at just the right time and go through all the paperwork again. Because of that, this group of customers needs to keep track of the movement in the financial industry and carefully consider when to renegotiate the deal. If action is not taken immediately, the rates might shoot back up after a month or two and the chance to realize savings could disappear.