What You Need to Know About Fixed Mortgages

A fixed mortgage is a where the amount of the loan is calculated at a fixed interest rate for a fixed term. This means that the interest rate for your mortgage loan remains the same even if interest rates go up or down. This is called “locking in” so that you are protected against rising interest rates.

Advantages of Fixed Mortgages

When you choose a fixed mortgage, you enjoy the peace of mind that comes from certainty. You never have to worry or think about how much your mortgage payment wil be next month – because it’ll always be the same as last month. So if you’re risk adverse and don’t want to deal with the (potential) stress of not knowing exactly how much your mortgage payment will be, fixed rates are f or you. And of course, in periods of rising interest rates, fixed rates tend to stay lower than variable rates (the opposite is typically true when rates are falling or are stable).

Disadvantages of Fixed Mortgages

Fixed mortgages typically have a higher rate than variable mortgages, because you’re paying for that certainty and peace of mind. Also,when you sign a fixed rate mortgage and, let’s say, a few months later rates go down, you’re pretty much stuck unless you’re willing to pay some stiff penalties. In fact, the penalties can be so big, that they more than offset any savings you’d get from switching your mortgage. Basically, fixed means fixed.

What Banks Don’t Tell Customers about Fixed Mortgages

When banks post the interest rates on fixed mortgages, many people think that the posted rates are the ones only available – and this isn’t always the case. If you’re a good customer or if your bank is afraid you’ll walk across the street to the competition, they may open up the vault and give you a more competitive rate than what’s posted.

Also, as mentioned in the chapter on variable rates, banks want you to go with a fixed rate – because they earn a lot of interest, and they also get the certainty that you’re going to be a client for a long (or a very long) time. As we discussed: many banks use the “rising interest rates” fear factor to get you to lock into a fixed rate mortgage, but they don’t tell you about the options available with variable rate mortgages – such as switching over to a fixed rate mortgage if interest rates start to rise.

Plus, some banks have an “unwritten rule” that self-employed persons, small business start-ups, and other people without a regular income stream should be screened more thoroughly when they apply for a fixed mortgage. And in some cases, they aren’t eligible for fixed mortgages unless they have substantial assets, or can put up a security for the loan.

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ABOUT THE AUTHOR:

Zack Ashan -- a.k.a. "The Mortgage Guru" -- is a licensed Mortgage Broker based in the Greater Toronto Area. Zack's personal mission is to help as many people as possible WIN the mortgage game, by providing them with clear, honest and valuable advice. Learn more about Zack and pick up his groundbreaking book "The Insider's Guide to WINNING the Mortgage Game" at http://www.mortgage-guru.ca.