Fixed vs Variable rate? That is the eternal question that most buyers and anyone who owns a property wants to know.
However, the true answer to that question is that it depends.
Currently, buyers are getting qualified based on a variable or fixed rate plus the stress test. So choosing fixed vs variable has significant implications to your buying power.
If you are qualified for a mortgage using a variable rate plus the stress test, you are being qualified at a lower rate than the fixed rate. This means that you will be approved for more money if you are qualified using the variable rate and less money using a fixed rate.
Most people lock into a fixed rate because they’re concerned that their payments will become too high as interest rates climb.
Consider getting qualified at the variable rate so that you can get a larger mortgage and then when it comes to the actual mortgage payments, contribute the same amount as if it were a fixed rate mortgage. Plus, after closing, if you really, really want a fixed you can check in with your mortgage broker or bank to lock into a fixed rate at that point.
For example, if the variable rate meant that your mortgage payments would be $3,000 per month and the fixed rate meant that your payments would be $3,500 per month, consider taking the variable rate and still paying $3,500 per month.
This way, $500 per month would be going directly towards your principle and, if rates rise, more of your payment would go towards interest. If you paid the fixed rate payment of $3,500 per month with a fixed rate mortgage, that additional $500 is going towards paying interest to your bank and not against your principal.
Wouldn’t you rather have your money stay with you instead of going towards the bank’s bottom line?
Think of it this way; do you pay yourself first (via extra principal payments) or the bank? I know that for me, the answer is simple.