By: James Hand

Fixed vs. Variable Rate Mortgages

Tags: Canadian mortgage rates, are fixed or variable rate mortgages better, should I choose a fixed or variable rate mortgage, fixed vs variable rates


A decision a lot of homebuyers and homeowners struggle with is whether to go with a fixed or variable rate mortgage. Both have their differences and similarities. In this post I’ll go over some of the differences between the two mortgage types and how our calculators on this site can help make your decision easier.

Fixed Mortgage Rates

If you’re looking for predictability, look no further than the fixed rate mortgage. With a fixed rate mortgage, your
mortgage payment and rate remain the same for the length of your mortgage term. When you sign up for a fixed
rate mortgage, you’re “locking in.”

Fixed rate mortgages are great for first-time homebuyers or anyone who is not comfortable with taking risks.
Someone who would sleep better at night knowing exactly what their mortgage rate and payments will be for
the foreseeable future. When you have a fixed rate mortgage, budgeting is a lot simpler. That’s because you won’t
have to stress about your mortgage payments increasing during your term.

While this may sound great, there is a cost to fixed rate mortgages. Mainly, you’ll almost always pay a higher
mortgage rate with fixed rate versus variable rate.

In Canada the most popular mortgage is the five-year fixed rate. The pricing of fixed rate mortgages is based on
what’s happening in the bond market. When bond yields are down, fixed mortgage rates go down and vice versa.

A key difference to be made aware of between fixed and variable rate is how the mortgage penalties are worked
out. Because of how the penalties are calculated, with a fixed rate mortgage you can end up with a
substantially higher mortgage penalty, especially if you’re breaking a mortgage with the banks.

This could also be a problem for many Homebuyers considering that in Canada roughly 67% of people
break their mortgages within the first 5 years.

For many people a fixed rate is worth it but or some it isn’t and that’s when they may choose to go with the
next mortgage type we’re going to talk about – variable rate.

Variable Mortgage Rates

If you're comfortable with taking a little risk to save money, and may be willing to break your mortgage before
the end of the term, then a variable or adjustable rate mortgage may be for you. 

With a variable rate mortgage, the mortgage rate is almost always lower than the fixed rate, however, there’s a
catch – your rate and interest payments might change at any point in your mortgage term.

This usually happens when your mortgage lender changes its prime rate (a lender usually changes its prime rate
based on the Bank of Canada changing interest rate).

The Bank of Canada has eight scheduled interest rate announcements in the year, although a noteable exception
since the COVID-19 outbreak, it is possible for our central bank to make emergency interest rate cuts at an
unscheduled time. A variable rate mortgage makes the most sense when interest rates have stabilized or are going down.

Mortgage lenders express variable mortgage rates as prime rate plus or minus a spread.

For example, if a mortgage lender is offering you a variable rate
mortgage at prime less 0.5% and the prime rate is 2.45%, then your
rate would be 1.95%. 

If you’re looking to be mortgage-free sooner, a variable rate mortgage can make sense. With a lower rate than the
fixed rate, you could set your mortgage payment to be the same as the fixed rate and pay down your mortgage sooner.

If you choose variable rate and you find yourself in a situation where interest rates are rising, most lenders allow
you to lock into a fixed rate mortgage at no cost (although your lender may not offer you the best rate since it
knows your only other alternative is to break your mortgage).

Speaking of breaking your mortgage, as I mentioned, a key difference is the penalty. Variable rate mortgages
almost always have a lower penalty than fixed rate. That’s because with most variable rate mortgages you’ll only
ever have to pay three months’ interest as the penalty.

If you like the stability of a five year mortgage term, but there’s a good chance you could sell the property before
the end of the term, you might consider signing up for a variable rate mortgage due to the fairer mortgage penalties.


The Bottom Line

Not sure whether to go fixed or variable? We and our lender partners are here to help! Using our calculators
you can easily switch between the two to compare rates and payments, letting you choose the mortgage type that
makes the most sense for you.