All about Canada’s most popular mortgage type

As you embark on your journey to secure a mortgage, you’ll find that understanding the nuances of fixed rate mortgages can make a significant difference in your financial future. While your local bank may offer some options, I believe that working with an independent, dedicated mortgage broker opens the door to a wealth of insights and tailored solutions. In this post I’ll explore why a fixed rate mortgage might be the right fit for your needs. Whether you’re a first-time homebuyer or looking to refinance for the umpteenth time, understanding fixed rate mortgages is essential.

What is a fixed rate mortgage?

A fixed rate mortgage is a type of home loan where the interest rate remains the same throughout the term of the mortgage. This means your monthly mortgage payment remains consistent, providing stability and predictability in your housing costs.

Fixed rate benefits:

The primary advantage of a fixed rate mortgage is the financial security it offers. Regardless of market fluctuations, your interest rate – and consequently your mortgage payments – won’t change. This makes budgeting easier and protects you from potential interest rate hikes.

1. Rate stability –

• Consistent payments: You benefit from knowing exactly how much your mortgage payment will be each month, making budgeting easier.
• Protection from rate increases: Since you’re shielded from rising interest rates, you can plan your finances without the risk of higher payments.

2. Predictable Payments –

• Long-term financial planning: Ideal for those who prefer to budget without unexpected fluctuations in monthly expenses.
• Peace of mind: Offers financial stability, especially for homeowners on a fixed income or with limited flexibility in their budget.

3. Long-term security –

• Hedge against economic changes: Provides security against economic volatility and potential future rate hikes.
• No surprises: Unlike variable rate mortgages, your mortgage payment won’t increase if interest rates rise.

Fixed rate mortgage considerations:

1. Potentially higher initial rate –

• Compared to variable rate mortgages: Fixed rate mortgages sometimes have slightly higher initial interest rates compared to adjustable rate mortgages. This may be worth it, for the benefits, but you’ll want to be informed.

2. Potentially higher penalties –

• Look at the small print: Be aware of penalties for paying off your mortgage early or refinancing before the term ends. Not all lenders calculate penalties the same way, so make sure to ask that these be explained to you in plain English.
• Consider your flexibility needs: Consider your future plans and whether you may need flexibility to move or refinance earlier than expected. In that case, you may need a more flexible mortgage product.

Who should consider a fixed rate mortgage?

1. First-time homebuyers –

• Financial stability: Provides security during the initial years of homeownership when budgeting is crucial.
• Predictable costs: You might find it easier to manage expenses, especially for those adjusting to new financial responsibilities.

2. Real estate investors –

• Predictable costs: You might find it easier to manage your investment knowing that the mortgage payment will stay steady during the entire mortgage term.
• Financial stability: Depending on your cash flow and how much buffer you have in your investment budget, you may wish to have a fixed mortgage payment that doesn’t risk exceeding a specific threshold of your investment property’s income.

3. People who are nervous about risk –

• The “can’t sleep at night” factor: You might find it much less stressful to go with a fixed rate rather than worrying about staying on top of the financial news to monitor potential rate increases.
• Financial planning: You’d like to incorporate stable mortgage payments as a predictable part of your long-term financial strategy.

Tips for getting the best fixed rate

1. Comparison shop and negotiate –

• Competition means more aggressive pricing: Don’t take the first offer you’re given – look at other mortgage lenders’ rates so you can play them off against each other.
• Broaden your lender horizons: Canadian lenders go beyond the typical local bank at the corner near your home. You might not know that smaller lenders can still be “AAA” lenders. The main difference is that you access them through online portals, phone and email. And, a big plus: they can be aggressive about offering you rate specials and extra bells and whistles.
• Use a mortgage broker: The above points are built in to the process when you’re working with a mortgage broker. Lenders know that we’re scanning all the rate specials their competitors offer. Utilizing the expertise of a mortgage broker enables you to access a wide range of lenders, saving you time and effort, and knowledgeably negotiating on your behalf. In fact, studies show that using a mortgage broker saves an average of 17.5%.

2. Maximize your credit worthiness –

• Review your credit report: A good credit score and credit history enable you to qualify for the most competitive rates and terms. As well, it’s important to address any discrepancies or issues on your credit report as early as possible, ideally long before applying.
• Organize your paperwork: Prepare the necessary documents such as proof of income, employment history, and assets. Ensure you’ve filed your income tax returns and dealt with any amounts owing to CRA.
• Save and pay down debt: Try to strike a balance between saving for a down payment and paying down outstanding liabilities. Typically it’s better to do that than to aggressively pursue one and neglect the other. Discussing your specific situation with a mortgage professional, and figuring out your mortgage game plan, will enable you to determine your best strategy with this.

Closing thoughts

Choosing between mortgage types is a personal decision influenced by your financial goals and circumstances. Fixed rate mortgages offer stability and peace of mind, making them a popular choice with my clients who are seeking predictability in their housing costs.

Ready to explore your options? Get in touch! I’m here to help guide you through the process and find the right mortgage solution tailored to your needs. Contact me today to get started on your journey to homeownership with confidence!

Photo [c] Natee Meepian for vecteezy dot com