Choosing Between Fixed and Variable Mortgage Rates for a 5-Year Term

When considering a mortgage, one of the most critical decisions you need to make is whether to go for a fixed or variable interest rate, especially for a 5-year term. This decision is particularly important during a period where mortgage rates are fluctuating, and there's a significant difference between fixed and variable rates.

Understanding Fixed vs. Variable Rates

Fixed mortgage rates provide a consistent interest rate for the duration of the term, which is typically 5 years or more. This means your monthly mortgage payments remain stable, making budgeting easier. In contrast, variable mortgage rates are tied to a benchmark, such as the Bank of Canada rate, and can fluctuate throughout the term based on market conditions.

Current Trends in Mortgage Rates

Currently, we see a stark difference between fixed and variable rates. As of early 2023, the 5-year fixed mortgage rate is at historic lows of 1.5%, whereas the variable rate is even lower at 1.2%. The gap between these rates is not significant enough to consider taking on a 5-year variable rate, especially given the potential for future rate hikes.

While the central bank has been cautious about raising rates, there is a possibility that rates might increase in the future. However, with the current record-low rates, the decision leans towards fixed rates for a 5-year term. Stability in monthly payments is a significant benefit for many homebuyers.

Factors to Consider

Deciding between a fixed and variable mortgage involves weighing several factors:

Interest Rate Spread: The difference between fixed and variable rates is currently minimal. As stated, the 5-year fixed is at 1.5% while the variable is at 1.2%. This small spread is not a compelling enough reason to take on the uncertainty of a variable rate. Employment Stability: If your employment situation is stable and you can comfortably manage your mortgage payments, a variable rate might be a good option. However, for those in uncertain employment situations, a fixed rate provides peace of mind. Size of Mortgage and Property: If you're taking out a larger mortgage or planning to keep the property long-term, a fixed rate is generally more appealing. A good rate on a 5-year fixed might be the way to go if you secure one.

Current Promotions and Trends

Lending companies are currently promoting variable rates, highlighting their potential savings. While it's important to consider these promotions, it's crucial to assess your personal situation and financial stability. If you and your employment can handle the fluctuations, a variable rate might provide significant savings over the term of the mortgage.

However, if you prefer the certainty of fixed rates and can afford the slightly higher cost, it might be wise to opt for a longer fixed rate term. Given the current low rates, this is a particularly good time to secure a longer-term fixed rate mortgage.

In summary, while variable rates offer the potential for lower costs when rates are low, the current landscape and future possibilities suggest that fixed rates are the better choice for most homebuyers. Make sure to carefully consider your financial situation and long-term goals before making this important decision.

Keywords: fixed mortgage, variable mortgage, mortgage rates, 5-year term, current rates