Fixed vs. Variable... Everything You Should Know!

Choosing between a variable rate mortgage and a fixed rate mortgage can be confusing and everyone will give you a different opinion, but at the end of the day you need to choose a mortgage term that is best for you. The main difference lies in how the interest rate is determined and whether it can change over time.
Fixed-Rate Mortgage

• Interest Rate Stability: The interest rate is locked in for the entire term (e.g., 3, 5, or 10 years).
• Predictable Payments: Monthly payments remain the same, which makes budgeting easier.
• Protection from Rate Increases: Even if the Bank of Canada raises interest rates, your rate and payments don’t change.
• Potential Downsides:
  • Fixed rates tend to be higher than variable rates at the time of signing.
  • Breaking a fixed-rate mortgage early can result in high penalties (typically the Interest Rate Differential (IRD) penalty).

Variable-Rate Mortgage

• Interest Rate Fluctuates: The rate is tied to the lender’s prime rate, which moves up or down based on the Bank of Canada's overnight lending rate
• Risk of Rate Increases: If the prime rate rises, your interest rate and payments may increase (depending on the type of variable mortgage - see the next section for more information).
• Possibility of Rate Decreases: If the Prime rate decreases then your payment could decrease (Adjustable rate mortgage) or the portion of the payment going toward interest could decrease (Variable rate mortgage).
• Flexibility: You can switch over to a fixed rate at any point during your term without penalty.

Two Types of Variable-Rate Mortgages in Canada

1. Adjustable-Rate Mortgage (ARM): Your monthly payment changes when the interest rate changes. 
2. Variable-Rate Mortgage with Fixed Payments: Your payment stays the same, but more of your payment goes toward interest when rates rise (meaning less goes toward the principal).

Which One Should You Choose?

• If you prefer stability and want to lock in a predictable payment, a fixed-rate mortgage is the safer choice.
• If you're comfortable with some risk and want to take advantage of potentially lower interest rates, a variable-rate mortgage may save you money over time.