It is so curious that US and Canadian mortgage market are so different. The 30-year fixed mortgage rate rarely exists in Canada. In Canada, the fixed mortgage rates expire after the term ends. The term can vary from 1 year to 10 years. The new mortgage rate will depend on interest rate environment when the term expires.
That’s why variable mortgage rate is much more popular in Canada than in US. The mortgage trigger rate is related to variable rate. There are two types of variable rate – one with fixed payment and the other with variable payments. Part of the payment goes to pay for the interest and the rest pays towards to principal. In the fixed payment scenario, when the interest rate increases, the portion goes to the principal will decrease. When the portion for the principal becomes zero, that is the trigger interest rate. This is a critical point because when the interest rate is higher than the trigger rate, your payment is no longer enough to cover the interest payment. Any interest unpaid will compound. Meaning there will be interest upon interest. It will snowball. Even if you keep making payment, your debt will grow bigger. This is very dangerous.
The Bank of Canada said in a November report that 50 per cent of variable-rate mortgage holders with fixed monthly payments had already hit the trigger rate point.
If you don’t have any buffer in your budget, perhaps a fixed mortgage rate is better for you. If you have sufficient savings every month and emergency fund, a non-fixed payment variable rate might be a better option because the payment amount will be increased when interest rate is up. That means you will keep paying off interest and principal. You are not deviating from your goal to pay off mortgage.
Yahoo finance has a more detailed explanation here.
Need to carefully pick the option that fits your financial situation the best. There is no such thing as one size fits all in personal finance.
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