What is a Fixed Rate Mortgage and How Does it Work?
If you’re buying a home for the first time or the thought of higher interest rates keep you up at night, then fixed rate mortgages may be ideal for you.
With a fixed rate mortgage, your mortgage payment and rate are fixed (stay the same) during your mortgage term. That means if you sign up for a 5-year fixed rate mortgage at 3.49%, then your mortgage rate will remain 3.49% for 5 years (provided you don’t sell the property and break your mortgage).
Unlike variable mortgage rates, which are based on a lender’s prime rate, fixed mortgage rates typically move based on the bond market. Government bond yields and fixed mortgage rates have a direct relationship – when government bond yields go up, fixed mortgage rates of a similar term length go up and vice-versa.
Although you’re protected from higher mortgage rates during your mortgage term, you can still face interest rate shock upon renewal. If fixed mortgage rates are a lot higher when you’re renewing your mortgage, you could be forced to put more of your money towards your mortgage on a monthly basis.