Fixed vs. Variable Mortgage Rates: Which is Better

When you are thinking about buying a home or refinancing your mortgage in 2024, one of the biggest decisions you'll face is choosing between a fixed or variable mortgage rate. 

Well, each option comes with its benefits and risks. So, choosing the right one can have a big impact on your financial future. 

In this blog post, you will get both types of mortgage rates simply and clearly. So, if you want to know more make the right decision. Keep reading!

What is a Fixed Mortgage Rate?

A fixed mortgage rate means that your interest rate stays the same throughout the term of your mortgage. Whether it's for 5, 10, or even 25 years, your monthly payments will not change during this time.

Let’s understand with a simple example.

Sarah chooses a fixed mortgage rate of 5% for 5 years. She knows her payments will be $1,500 every month, no matter what happens in the market. Even if rates rise, she is protected. However, if rates drop to 4%, she must continue paying 5% unless she breaks her mortgage, which incurs penalties.

Pros & Cons of Fixed Mortgage Rate

What is a Variable Mortgage Rate?

A variable mortgage rate changes with the market. It ties to a benchmark interest rate, which the Bank of Canada sets. As the benchmark rate moves up or down, your mortgage rate (and monthly payments) will follow.

For example: John picks a variable rate starting at 4%. His payments are lower at first, around $1,400 per month. However, after two years, interest rates rise, and his payments increase to $1,600. While he saved money in the first two years, he ended up paying more in the third year.

Pros & Cons of Variable Mortgage Rate

How Do Interest Rates Look in 2024?

Experts expect interest rates to remain somewhat unpredictable in 2024. However, the Bank of Canada has increased rates in the past few years to control inflation. 

• Fixed Rate Outlook: Fixed mortgage rates in 2024 are likely to remain stable but on the higher side compared to previous years. While this provides the safety of knowing your rate won’t change, it also means you might lock in at a higher rate if the market shifts.
• Variable Rate Outlook: Variable rates are expected to start lower than fixed rates, as they typically do. However, with the possibility of more rate hikes, there is a risk that your payments could increase over time.

How to Choose Between Fixed and Variable Rates in 2024?

Deciding between a fixed or variable mortgage rate comes down to your financial situation, risk tolerance, and market predictions. Look at some essential points to consider:

1. Your Budget

• If you prefer knowing exactly how much you’ll pay every month, a fixed rate might be better for you. This is especially true if you have a tight budget and can’t handle sudden increases in payments.
• On the other hand, if your budget has some flexibility and you can handle possible fluctuations, a variable rate might save you money.

2. Risk Tolerance

• A fixed-rate offers peace of mind if you worry about rising rates and want to avoid stressing over market changes. You won’t have to monitor the market or worry about your payments going up.
• If you’re comfortable with a little uncertainty and believe rates may stay low or decrease, a variable rate could be a smart choice.

3. Market Trends

• Look at current market trends and expert predictions. Locking in a fixed rate might save you from future increases if experts expect rates to rise. Moreover, a variable rate could be the better option if they predict rates to drop.

4. How Long You Plan to Stay in Your Home

• If you plan to stay in your home for a long time, a fixed rate may offer more stability over the years.
• If you think you might sell your home or refinance within a few years, a variable rate could save you money in the short term.

Conclusion: Which Is Better in 2024?

There’s no one-size-fits-all answer to whether a fixed or variable mortgage rate is better in 2024. But, it depends on your financial situation, your risk tolerance, and how the market evolves.

• If you value predictability and want to lock in a stable rate, go with a fixed mortgage.
• If you’re comfortable with some risk and believe rate cuts or stay low, a variable rate might be the smarter choice.

The Bank of Canada rate forecast suggests potential fluctuations in interest rates throughout 2024.

Thus, before making a decision, it’s a good idea to talk to a mortgage advisor. They can help choose the mortgage that’s best for you in 2024. Whatever you choose, make sure it aligns with your long-term financial goals and gives you peace of mind.