Variable Rate vs. Fixed Rate
This rate fluctuates with prime rate. Prime rate increases or remains the same based on the decision of the Bank of Canada, who meets 8 times per year. During these meetings, a decision on whether the Bank of Canada's overnight lending rate will increase, decrease or remain the same. Overnight rate is the interest rate that major depository banks use to borrow and lend one-day funds to one another.
What Happens if Bank of Canada Increases the Overnight Rate?
If they decide to increase the overnight lending rate, banks will need to increase their prime rate to manage their bank spread, in turn this would increase a borrower's variable rate. If prime rate increases, you can expect your monthly payments to increase. For every 0.25% rate increase on a $100k loan, it is a $13 increase per month. Historically, variable rate has always been better savings than fixed rate.
What is the Penalty for Breaking a Variable Rate Mortgage?
The penalty for breaking a closed term variable rate mortgage early is 3 months of interest.
Variable Rate
TOPIC
Interest Rates
AUTHOR
Jessica Kuan
Fixed Rate
If you cannot sleep at night knowing your payments may have slight fluctuation, then I would recommend a fixed rate mortgage. In a fixed rate mortgage, your payments stay consistent for the length of your term. Your interest rate may be slightly higher than a variable rate mortgage, but if prime rate is expected to increase multiple times throughout the year--- locking into a fixed rate may be beneficial.
How are Fixed Mortgage Rates Determined?
Fixed mortgage rates are guided by our bond yields. If bond yields increase, our fixed mortgage rates will increase. When bond yields decrease, our fixed mortgage rates decrease. They have a positive relationship with one another. The bank earns money from lending their money out through mortgages, personal loans, etc. However, banks also collect deposits from customers and pay them an interest. The ratio between the money that is collected from lending and the money that is paid to customers for depositing is called the bank spread. This bank spread can indicate the bank's profit margin. Just think about this: if they're paying clients more on deposits, then they will be charging their borrowers more on loans.
What is the Penalty for Breaking a Fixed Rate Mortgage?
The penalty for breaking a closed term fixed rate mortgage early is the interest rate differential on the remaining length of the term. This means it is the difference of the current posted rate minus your contract rate x the remaining months in your term. If there is a lot of time left in your term, this can end up being quite costly.