When considering a mortgage, one of the biggest decisions you will make is whether to go for a fixed or variable rate. A variable-rate mortgage can offer flexibility and potentially lower interest rates, but also carries the risk of interest rate increases.

You may think in today’s times with higher interest rates than we’ve seen over the past couple of years that you would be crazy to take the variable interest rate route, but what if I told you weren’t?

We are going to dive into the benefits of a variable rate mortgage and paint a little picture that may sway how you think. Our objective is to educate homeowners/buyers with ALL the benefits so they can make an educated decision.

Potential for lower interest rates
One of the main advantages of a variable rate mortgage is that you likely end up paying less interest over the course of your mortgage when interest rates are down. This is because your mortgage rate is tied to the prime rate, which can fluctuate based on factors such as the Bank of Canada’s overnight rate, inflation, and economic growth. If the prime rate decreases, your mortgage rate will decrease, which means you could end up paying less interest. This can save you thousands of dollars in interest charges over the life of your mortgage. It’s important to keep in mind that we may be at the peak of Bank of Canada rate increases. Many of us are hoping to see a downward trend in variable rates over the next year or so.

Flexibility
A variable rate mortgage can offer more flexibility than a fixed rate mortgage. With a fixed rate mortgage, you’re locked into a specific interest rate and payment amount for the entire term of your mortgage, which can make it difficult to make changes if your financial situation changes. With a variable rate mortgage, your payment amount can change if your interest rate changes, which can give you more flexibility to adjust your budget if needed. This can be particularly important if you are self-employed, have a variable income or if your job is in a field where salaries are less predictable.

Option to lock in your rate
Although a variable rate mortgage is subject to fluctuations in the market, most lenders will allow you to switch to a fixed rate mortgage at any point during your term. This can be particularly appealing if interest rates are low and you want to lock in that rate for the remainder of your mortgage. This way, you can enjoy the flexibility of a variable rate mortgage while still having the option to switch to a fixed rate if necessary.

Lower penalties for breaking your mortgage
Breaking a mortgage before the end of its term can result in penalties, which can be significant. With a variable rate mortgage, the penalty for breaking your mortgage early is typically three months of interest, whereas with a fixed rate mortgage, it can be much higher. This can be particularly important if you anticipate needing to sell your home or refinance in the near future.

We have explored the general benefits to a fixed rate mortgage, but wanted to show a scenario with today’s rates and industry numbers. Currently fixed rates are generally lower than the variable rate on mortgages today in Canada. For example;
$375,000 mortgage
Fixed with a 5 year term = Monthly Payment – $2147
Variable Monthly Payment – $2355

With this scenario there are two important things to note. 1. With a fixed rate you are locked into the rate for the entire term. Your payment is $2147/month for 5 years. 2. The variable rate is currently over $200 more a month, however, as prime fluctuates over the 5 years, so does your mortgage payment.

If prime was to head south in the range of pre pandemic numbers, your monthly payment would be $1962, which would be saving you money each month.
*Above numbers are hypothetical and for illustrative purposes only. This is not a commitment to lend, pre-approval or approval.

In conclusion, a variable rate mortgage can be a great choice for those who value flexibility, have a risk tolerance and the potential for lower interest rates, However, it’s important to remember that a variable rate mortgage is subject to fluctuations in the market, which can lead to higher payments if interest rates increase. It’s important to consult with a mortgage professional to determine if a variable rate mortgage is right for you and to understand the risks and benefits associated with this type of mortgage.

It has become apparently harder for the younger generation to purchase their first home. With the interest rates and stress test, and let’s not forget the price of homes, entering home ownership isn’t easy. However, there has been a trend over the past couple of years – what we call the Bank of Mom and Dad.

There are many reasons why a parent may choose to help their kids flea the nest and become home owners, and this blog is to help you – The Parents – help your kids, if that’s what YOU choose.

“The purchase of a residence is one of the most significant financial milestones in your life. It provides both monetary prosperity and emotional security.”
– Suze Orman

Help With the Down Payment
I would say this is the most common way parents choose to help their kids, because it’s completely subjective to what you want and can afford to give. You have the choice to loan OR gift the money – but this should be determined prior to any transactions or purchases. Have a conversation and lay out your expectations in advance and it doesn’t hurt to get it in writing to protect both of you in the event someone isn’t remembering right.
If you chose to gift the money to your kid a gift letter would be required for the lender, which your Mortgage Professional would provide you. They will want to know where the money came from and the funds are in fact a gift from yourself.

Co-sign the Mortgage
If your kid does not qualify for the mortgage on their own, due to low income and/or credit issues, you may consider co-signing.. This is another great way to help them qualify, however with every financial decision there are risks. It is important to ensure you understand the benefits and risks you are taking by co-singing for the mortgage. Yes you share the liability, but you also share the asset. Co-signing can be for the life of the debt OR you can have an “exit” plan once your kid is able to qualify on their own. Understanding why your kid does not qualify on their own will help you establish an agreement and the steps you both need to take to ensure the success of yourself and your kid. It is important to remember that the mortgage will show up on your credit bureau as a liability, which may affect your credit and/or future borrowing power.

Loan the Money
If you are financially stable enough to loan the purchase price or part of it to your kid this is another way you can help them enter home ownership. You can establish what the payback conditions are, and make it legal by involving a lawyer to represent both you and your kid. The benefit to loaning them the money is you can decide on how much interest to charge. Maybe you decide to offer an interest rate lower than they are able to get from a bank or lender. It’s important to remember that if the money is to be paid back, the lender will require the mortgage applicant to debt service this new loan as a debts in their application.
Utilize the “Refi & Buy” Strategy
If you have a young child or children and are wondering “Will they ever be able to afford to buy a home?”, this strategy may help. Many parents are considering purchasing investment properties now, that they children can either live in and rent during college or university, or that they can sell & gift the money to the children to help get started on adulthood. The value of homes tend to have an upward trend, allowing you to invest now and capitalize on the equity at a later date. Buying an investment property requires a minimum down payment of 20%. If you don’t quite have the cash to purchase a property now, but it’s still something you’re interested in, you can consider using the equity in your current home as a down payment towards the next home.
Final Thoughts
If you have the means and desire to help your kid buy a home there are many ways to do so, just do it smartly. Remember, have the conversations prior to any exchange of money, set out your expectations in writing and have fun shopping for your kids first home.