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With the Bank of Canada expected to start cutting interest rates in the second half of 2024, variable-rate mortgages are back in the spotlight. But should you consider getting one?

A variable-rate mortgage is a home loan where the interest rate changes with the prime rate set by the Bank of Canada. There are two main types:

  1. Adjustable rate mortgages (ARMs): Your monthly payments change with the interest rate. If the prime rate drops, your payments decrease; if it rises, your payments increase.
  2. Fixed-payment variable-rate mortgages: Your monthly payment stays the same, but the portion going towards interest and principal fluctuates with the prime rate. When rates rise, more of your payment goes to interest, and when rates fall, more goes to principal.

Given anticipated rate cuts, variable-rate mortgages may offer flexibility and potential savings. However, it's crucial to assess your financial situation and risk tolerance before deciding.

Let's delve into whether a variable-rate mortgage aligns with your needs and objectives.

Pros and cons of variable-rate mortgages

Pros:

  1.  Flexibility to switch: You may be able to switch to a fixed-rate mortgage during your term if interest rates don’t fall as quickly as expected, allowing you to lock in a stable rate.
  2. Cost savings on early repayment: If you need to break your mortgage early, the prepayment penalties on variable-rate mortgages are generally lower–often just three months’ interest, compared to penalties for fixed-rate mortgages.
  3. Potential for rate drops: With the Bank of Canada poised to reduce rates, borrowers could see their interest rates decrease, leading to savings over the life of the mortgage.

Cons:

  1. Rate fluctuation risk: The primary risk with a variable rate mortgage is that your interest rate and monthly payments can increase if the prime rate goes up. While rates are unlikely to increase in the short term, there are no guarantees and they could remain at elevated levels for longer than expected.
  2. Economic sensitivity: Variable rates are influenced by broader economic factors, meaning global economic shifts, political changes, or unexpected financial crises can impact your mortgage rate.
  3. Qualification criteria: Lenders may have stricter qualification criteria for variable-rate mortgages. Borrowers may need to demonstrate a stronger financial profile to manage potential rate increases.

Is a variable-rate mortgage right for you?

Deciding whether to opt for a variable rate mortgage depends on your financial situation, risk tolerance, and future plans. 

If you are comfortable with potential fluctuations in your monthly payments, a variable-rate mortgage might be a savvy choice. However, if you prefer the security of predictable payments, a fixed-rate mortgage could be more suitable.

Let's make the decision together

Choosing the right mortgage can be daunting, especially in a time of challenging economic conditions. But you don’t have to navigate this decision alone. 


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