What is a Fixed Fee (rate) Mortgage?

There are many different types of mortgages that you’ll be presented with while shopping around to buy your investment property. A fixed-rate mortgage is the most popular option, and it has a number of benefits, but it’s not the perfect choice for everyone.

A fixed-rate mortgage means that the interest rate you’re paying will remain the same throughout the term of your mortgage. You can refinance when the time comes—unless you have a closed term mortgage, but until then, your interest rate won’t change. A variable rate mortgage, on the other hand, means that your interest rate will fluctuate with the market. Neither style is right or wrong. It really comes down to your individual needs and what will suit you the best along with your risk tolerance.

Is a fixed-rate mortgage the best option for you or should you consider something else? We’re going to help you understand the specific situations in which a fixed-rate mortgage makes the most sense.

What are some facts about fixed-rate mortgages?

  • Fixed-rate mortgages are often preferred by people who plan to stay in their investment property for a long time and want the stability.
  • You’re immune from changes in the financial markets, so you don’t have to speculate on them.
  • You may end up paying a slightly higher rate in return for this stability, but it’s predictable and it can also mean you’re locked into a lower rate if the markets change drastically.
  • When your term is up, you will lock in at the new going rate.

What does it mean to have a fixed-rate mortgage?

Having a fixed-rate mortgage means that you’ll have an easier time budgeting throughout the term of your mortgage because you’ll always know exactly how much you’re going to be paying for the foreseeable future.

It also means that more of your monthly payment will be going towards the principal of your loan. Earlier on in the term of your mortgage, more of that payment will go towards interest rather than principle, but towards the end of your term, that reverses and a bigger chunk of each payment is spent towards paying off the principle rather than servicing the interest. This benefits people who plan to hold their mortgage throughout its duration. It also means that a variable fee could benefit someone who doesn’t plan on that.

Is it better to get a fixed or variable mortgage?

There isn’t one concrete answer to this question, so let’s take a look at some of the market conditions and signals you can look for to help you determine which option is best.

If there is a large gap between the rates of a variable or a fixed-rate mortgage, then it could be worthwhile to consider a variable rate. If the rates are close, then locking in a fixed-rate could be a better idea. The problem with variable mortgages is that while you could end up paying a bit less in the long run, you’re also exposed to greater risk and market turmoil, so your payments could end up increasing. If you aren’t able to fit that type of change into your budget, then you should probably avoid this risk altogether and opt for the stability of a fixed-rate mortgage instead.

Adjustable-rate mortgages, known as ARM for short, are usually a better idea for people who don’t plan to stay in their property for much longer. This is because you’re only exposed to the extra risk for a shorter period of time. So, if you’re nearing the end of your mortgage payments and it’s time to renegotiate, then this could be a good chance to switch over to an ARM. On the contrary, if you plan on staying in place for many years to come, then you’ll benefit from the stability of a fixed-rate mortgage and from the way the interest and principal are paid off over time.

Is a fixed-rate mortgage a good idea?

A fixed-rate mortgage is a good idea when rates are low and you anticipate that they will move higher in the future. You can’t predict the future and any number of external factors can impact interest rates, so there’s always a certain degree of speculation here.

You can look at recent months and years to see what trend the rates are going in and use that as a baseline. If rates are very low, then it’s generally a good idea to lock in those rates with a fixed-rate mortgage. A fixed-rate can cost a bit more at the time, but this will more than balance out as rates rise. If rates are on the higher end, then it’s not always the best idea to lock in at a higher rate. In the event that rates are already higher, it’s not necessarily as tempting to go with a fixed-rate mortgage.

Historically speaking, when researchers take a look at past rates, it’s generally seen as a good idea to go with a variable rate if we’re just looking at what’s worked out in the past on average. Of course, the past is the past and it can’t predict the future. Anything can happen in the time span of your mortgage. It’s easy to cherry-pick periods in history where a certain type of loan would have performed better, but there are still plenty of shorter periods within those where things could have gone either way.

This is why you need to figure out your personal tolerance for risk and to know your monthly budget like the back of your hand.

To put it simply: An ARM could end up costing you more than a fixed-rate loan or it could end up costing you less. You won’t really know until you’ve already locked in your decision.

The longer that the real estate investor plans to own the property, the riskier an ARM becomes. At first, the rates can be favourable, but more time means more chances for those rates to move around. Again, you could also end up with a better rate, too, but if you would rather not speculate on the interest rate markets, then a fixed-rate mortgage is best for you.

Where do I get my fixed-rate mortgage?

You can choose to get a fixed-rate mortgage directly from your bank of choice or you can deal with a mortgage broker. The advantage of going through your bank is that you already have a relationship there. It’s convenient and you can save yourself some trouble by not having to shop around. On the other hand, you might not find the best rate at your bank, so whether you’re going ARM or fixed, you could be leaving money on the table.

Another option is to work with a mortgage broker who will assess your needs and will hear from multiple lenders to get you the most beneficial offer.

What are some final considerations for fixed-rate mortgages?

To sum it all up, if you want consistent payments each month, then a fixed-rate mortgage is a good choice. Your monthly payment will remain the same throughout the entire length of your mortgage term. The interest rate may change, but if you’re locked in with a fixed-rate mortgage, then this won’t impact you. The principal and interest are paid off in different ratios, which can have more of an impact than the actual mortgage rates you’re paying in some cases, so this is something else you should consider when shopping for mortgages.