Demystified: Fixed Rate Mortgage And Variable Rate Mortgage

Demystified: Fixed Rate Mortgage And Variable Rate Mortgage

March 6, 2021

Submitted by: Chris Mcguire

Fixed mortgage rates are decided by the price of government bonds and the bond yield. Investing in bonds are in general considered safer than stocks, and as soon as there is financial turmoil, investors normally will unload equities in preference to bonds, particularly Government bonds, and at the same time as the stock market is thriving, investors in all probability would make a higher return on investment in equities. This way there is a lower demand for bonds; as a result, their valuation decreases that add to their yield. On the other hand, as soon as the economy turns out to be less stable and stocks do not look as attractive, the demand for bonds rises that reduces their yields.

As soon as the governments long-term bond prices, for instance the 5 year, increases, this results in a lower returns, in general plummeting the five year borrowing costs for mortgage lenders who can then pass on these savings to customers in the shape of lower 5 year fixed mortgage rates. On the other hand, during these exceptionally odd times, caused by inadequate liquidity in the markets, across the world banks are timid to lend to each other and are flush with cash, soaring borrowing costs this results in lenders having to pass on this increase on to customers in the shape of high fixed mortgage rates.


When it comes to variable mortgage rates, Bank of Canada plays a huge role in influencing variable mortgage rates for the reason that overnight target rates are set by the bank and is described as, Intraday average interest rates between financial institutions/banks. On this, banks base their Prime Lending Rates and the Bank of Canada does not interfere on lender’s Prime Rates and are independently determined by each financial institution/banks, further these are based on the cost of short-term money.

Variable mortgage rates that are advertised by banks are directly depended on Prime lending rate, which means that the interest rate you will be paying is directly associated to the Prime rate, and will change each time this changes. As a result, if the Bank of Canada cuts rates by 1% or 100 basis points, lenders mostly follow the bank and reduce their Prime rate too, given that their cost of borrowing falls, this means that your payments on a variable rate mortgage will reduce. This is an excellent choice if interest rates are plummeting. However, at present due to economic crisis banks have stopped lending to each other in the short-term, for the reason that they are fearful they might not get their money back thanks to the volatility in the system. Accordingly, inter-bank lending rates have risen and this increased cost is now being passed on customers by increasing interest rates.

Now it all comes down to which is a better option, fixed rate mortgage or a variable rate mortgage. This in fact relies on, each person s condition and whether he or she can handle the varying mortgage rate payments both monetarily and psychologically for the reason that the last thing you would like to do is being concerned given that interest rates could rise. Otherwise if you would feel more relaxed knowing the stable fixed rate you would be paying, over the next few years. As a final point, it is up to you to choose which will be best for you fixed rate mortgage or variable rate mortgage.

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