Question

If you were contracting for a mortgage in Canada soon, would you prefer a fixed rate or a floating rate? If you were to choose the fixed rate what would be a good deal right now? Explain.

Answer 1

As we have observed in recent years, the gap between fixed and floating rate mortgage has reduced. On one side, fixed rate mortgages are swelling up, on the other hand floating rate remains low but are more riskier. Thus it becomes quite tricky to choose between the two in real time scenarios like in Canada.

Case 1:-Considering floating interest rate:

In this case interest is lower than the fixed rate mortgage, but the foremost limitation is risk involved. So without prior notice interest rate could increase or decrease. One should only go for floating interest rate if he/she can afford the high interest rate.

Points to note While investing in floating rate:

1.Income

2.Earnings

3.Potential for increase in earnings

Floating rate mortgage is attractive because the rate is calculate based on prime rate and it is generally lower than the fixed rate. payments are mostly fixed (two years or three years)

Case 2 Considering fixed mortgage rate:

Fixed rate mortgage are attractive because it allow to budget accurately and the borrower is secured from sudden increase in monthly mortgage payments if there is a rise in interest rate. But the disadvantages of fixed rate is that the interest rate are shooting up and getting a loan is difficult because the payment will weigh heavy on our pockets.

Talking of Canada, According to a study 70% of the clients of any particular mortgage choose a floating rate mortgage.

Over the last ten years, people  who have selected  a floating rate mortgage have done very well.

Five years fixed rate has been popular in Canada traditionally but because of narrowing gap between the interest rate the people of Canada is diverting from fixed rate to floating rate.

The good deal right now is to take the advantages of floating rate mortgage when the rates are low and then switch to fixed rate mortgage when rate increases.