One of the key decisions you will need to make in your property buying journey is the type of mortgage repayment period you are going for and whether you want a fixed or variable rate mortgage.

Some homeowners will have just gone for what seemed like the cheapest option from a monthly payment perspective. However, there are other factors to consider, and it also may not be the cheapest option in the long term.

A fixed-rate mortgage will stay the same each month. That means if your mortgage payment is $1,500 per month, it will stay that way for the duration of the mortgage period. However, some mortgages will only give you a fixed rate for a specific period of time—for example, 5 years out of your 20-year mortgage.

Comparatively, a variable rate mortgage can change your monthly payments over your time period. This is based on what the current prime lending rate is set at by your lender. The rate will generally be quoted as the Prime rate +/- an amount. For example, Prime -0.5%. The relationship with the prime rate will stay fixed throughout your mortgage period. Therefore the variable here is the prime rate itself. The prime rate can fluctuate significantly depending on the current economic situation within the country/world.

A variable rate mortgage tends to be slightly lower in cost than a fixed-rate mortgage. This is simply because a variable rate could get the lender a slightly higher payment as the prime rate increases, and therefore provides less risk for the lender. A fixed-rate is somewhat riskier for the bank, as if the prime rate shoots up, they are then losing out on significant income, which is why it tends to start at a higher rate from the beginning to entice buyers into the variable rate.

Pro

• You don’t have to worry about variations in your monthly mortgage payments. This means you know what you need to pay, and it is as simple as that. You don’t need to worry if the rate increases if you can afford it. The makes planning your personal budgeting far more simple and stress-free

Pro

• When we look at what history can tell us, the variable rate mortgage has been less expensive over a prolonged period than the fixed-rate mortgage. There may be times when it is higher, but over a 25-year mortgage in the past, the overall payments have been lower.

As stated, history shows that the prime lending rates show that a variable rate mortgage is cheaper over the long term. The prime rate will fluctuate depending on the state of the economy and other factors such as unemployment, inflation, imports/exports, and more.

As a general rule, when inflation is high, the Bank of Canada will increase the prime rate to increase the cost of lending, reducing inflation over time. Conversely, when inflation is too low, they may decrease the rate to incentivize spending. You will have seen this in the aftermath of the 2008 financial crisis, where the rates were at record lows to incentivize people to get back into the property market. We have had historically low rates ever since 2008, which have remained relatively stagnant, so only the future will tell what is in store for the prime rate and the cost of lending via a variable rate mortgage.