Variable or Fixed... which one is best?
It is an age old question in the land of mortgages... fixed or variable rate, and which one is the better mortgage.
Some mortgage professionals will always steer you towards one or the other usually based on their personal preference. While that might work for some, it doesn't for most.
Just as we are all unique individuals, so too are our personal finances. We all have varying levels of risk tolerance and financial capacity, both very important things to consider when obtaining a home loan.
If you are highly risk adverse, or would struggle to meet any increases in your payment amount; chances are pretty good that a variable/adjustable rate mortgage is not a good choice for you. Yes, historically these products result in less interest being paid, but that does not always apply, nor does it mean that it is the right product for you.
Having rate savings is a great thing, and we all want to pay less to borrow money. The reality however is that sometimes paying a little more on rate can save you a lot of money in an uncertain economic climate. Sure, the actual interest you might pay would be less over time, but if your payments suddenly increase, or less and less is being applied to principal - you are not actually saving all that much.
If any sort of uncertainty around the amount of your payment, chances are also very good that having a variable/adjustable rate mortgage will cause you to lose sleep at night. For a lot of Canadian home owners they are also seeing amortizations being extended out as far as 98 years!
When getting a mortgage, the rate of interest is a key factor considered by borrowers and the lenders. Rate is a tool that lenders use to mitigate risk, and earn an income on their investment in granting a mortgage.
As the home owner, the single biggest impact on your day to day finances is not rate, it is the payment amount. Every penny that you have to spend means less money in your pocket, when rates are low and stable, a variable might make sense. If any sort of payment fluctuation causes you stress, then a fixed payment amount is critical if you want to be able to enjoy your home and lower your stress.
Make no mistake, a fixed rate mortgage is not perfect either, but as with any other lending product how much you end up paying has as much to do with how you pay as your rate does. A well structured mortgage plan, based on your own personal financial capacity and experience, can be paid off in as little as 1/2 the time when a plan is in place. You can still save money and have some peace of mind and certainty for month to month obligations.
For some the rate is truly king and they are prepared to weather upheaval and can manage to maintain the home even with an escalating payment amount. For the majority of Canadians a fixed rate mortgage makes a lot of sense, they want the stability knowing that they can create an effective long term budget and savings plan.
If payment obligations change the first thing that usually suffers is our savings. We put less money away and hope that rainy days do not come too soon. Secondary to that is the impact on our ability to maintain our lifestyle both financially and emotionally. The money side of things we know about because we live it every day of our adult lives, it is the emotional toll that is largely ignored.
Financial stress is the number one cause of adult suicide, the number one reason for marriage break down, and is a significant cause of health issues like heart attacks, anxiety, depression and more. The last thing most people need in their lives is any additional stress piled onto what is already a rather large pile for most.
We are not suggesting that a variable/adjustable rate mortgage is a bad product, far from it. That doesn't mean that it is for everyone - as the old saying goes... "Just because you can doesn't mean you should." While the interest rate savings are very attractive understanding the heightened risk of the product is crucial if it is to be of meaningful benefit to you.
Any seasoned mortgage professional will ask you about your risk tolerance, your preferred payment amount, as well as understand your goals for today and into the future. If a mortgage is going to hinder your ability to achieve your dreams, it is not a good mortgage for you.
No matter what you choose to do, it is very important that you ask these three questions (and get answers).
1) What is my personal risk tolerance? IF you are not sure, consider what type of investment you would be willing to make. Would you be comfortable taking a big risk, or do you prefer more predictability?
2) How will this product help you achieve your financial goals?
3) Was there any consideration given for your overall financial picture? If yes, ask for clarity and details. If the answer is no... you are probably not working with the right professional.
A mortgage in of itself is not complicated, what does make it complicated is the advice we receive, the media we read, and of course the internet.
If you are in need of some good, ethical, advice that is based on your personal financial circumstances, you can Relax. Haystax is here to help!
