Mortgage Rates

Mortgage rate, or mortgage interest rate, is the price for the bank to lend you money. It is normally expressed as an annualized rate. When you are told your mortgage rate is 5%, that means it is 5% annually.

In Canada, mortgage rate can be fixed or float over your mortgage term.

Fixed rate mortgage means the mortgage rate won’t change after it is funded but not matured.

Variable mortgage is often expressed as “P+x” or “P-x”, where P refers to Prime Rate and x is certain base points. Variable mortgage means the mortgage rate during the term could change and the change follows change in Prime Rate, which is virtually determined by Bank of Canada overnight rate.  However, the formula is fixed and the x is constant.

For instance, the best variable rate is P-0.9 right now and prime rate currently is 3%, So your mortgage rate is 2.1%. One year later prime rate may be up to 3.5%, then your mortgage rate increases to 2.6%. It is still P-0.9 though.

There have been numerous articles to explore the possibility of comparing a fixed rate mortgage to a variable rate mortgage. Methodologically it is impossible without necessary assumptions. However, historical data tell that a variable rate mortgage is more likely to save your money than a fixed rate mortgage. The rationale behind the statistics is simple: When you choose a fixed rate mortgage, you kind of choose an assurance for your future and you have to pay premium for it.

It’s obvious that the two types of mortgage are for different mortgage consumers with respect to risk. If you think you are an informed consumer and tolerant to fluctuations to some extent, Variable rate mortgages would be better for you. Otherwise, it is recommended to take a fixed rate mortgage. The good thing for a fixed rate mortgage is the fixed periodical payments. Once you sign the deal, you do not have to worry about changes in market rates and you can make your household budget accordingly.