The safe and sound choice in today’s mortgage market is to lock down a rate for five years and let borrowing costs do what they may.
Variable-rate mortgages can also be cheaper than fixed-rate mortgages in the cost to break your loan before the term is up.
People who demand the flexibility to exit a mortgage early at no cost can choose an open mortgage, but the cost is an extra-high mortgage rate.
Breaking a mortgage is fairly common.
RateSpy.com says discussions with lenders suggest that only a little over half of borrowers with a five-year mortgage reach the end of their term, and that 15 per cent to 20 per cent of borrowers pay a penalty when breaking their mortgage.
“A lot of people say they’re not going to make any changes during their mortgage term,” said Kola Ifabumuyi, a mortgage planner who reports that more than 90 per cent of his clients are going with a variable rate these days.
“But many will break their mortgage.” People break mortgages and pay penalties because they’re divorcing, they’re swamped by debt and need to refinance, they want to pay off their loan early or they’re selling and moving somewhere else.
With a fixed-rate mortgage, you pay the greater of three months of interest or what’s known as interest rate differential.
Depending on the rate environment, variable-rate mortgage penalties can be much lower than the IRD.
The latest annual state of the mortgage market report by Mortgage Professionals Canada (representing mortgage brokers) found that of the homes purchased in 2016 and 2017 with a mortgage, 72 were fixed-rate, 24 per cent were variable and 4 per cent were a hybrid of fixed and variable.