The decision to purchase a home is one of the most important financial decisions a person can make in their lifetime. With such an enormous commitment, it is important to understand the different types of mortgages available in Canada, and the differences between fixed-term and adjustable-rate mortgages.
A fixed-term mortgage is a loan with a set interest rate that remains the same over the entire repayment period. This type of loan offers the borrower predictability and stability, as the repayments are known from the onset. Fixed-term mortgages can be taken out for periods of up to 30 years, with the most common term being five years. The interest rate on a fixed-term mortgage does not change over the course of the repayment period, and the payments remain the same for the entire term.
An adjustable-rate mortgage (ARM), also known as a variable-rate mortgage, is a loan with an interest rate that fluctuates over the course of the repayment period. ARMs are typically taken out for shorter periods of time, such as three or five years. The interest rate on an ARM is based on a benchmark rate, such as the Bank of Canada’s prime rate, which means that it can increase or decrease at any time. This means that the payments made on an ARM can change significantly during the repayment period.
When choosing between a fixed-term and adjustable-rate mortgage, there are a few factors to consider. The primary advantage of a fixed-term mortgage is that the payments remain constant for the entire repayment period. This makes budgeting for a fixed-term mortgage easier, as the borrower can accurately predict their future payments. Additionally, fixed-term mortgages typically have lower interest rates than ARMs, meaning that it can be cheaper to borrow in the long run.
On the other hand, adjustable-rate mortgages offer the potential for lower payments in the early years of the loan. This is because the interest rate is typically lower than the fixed-term rate, and the payments can fluctuate depending on the benchmark rate. This presents an advantage to borrowers who expect their income to increase over the course of the loan, as they can take advantage of lower payments in the beginning and potentially benefit from lower interest rates in the future.
When it comes to mortgages in Canada, it is important to understand the differences between fixed-term and adjustable-rate mortgages. Fixed-term mortgages offer stability and predictability, while adjustable-rate mortgages can provide lower payments in the short term. Which type of mortgage is right for you will depend on your individual financial situation and future plans. It is important to speak with a financial advisor to determine which type of loan is best for you.