What Is The Difference Between A Fixed Rate Mortgage And A Variable Or Adjustable Rate Mortgage?
A fixed rate mortgage is one where the interest rate stays the same (is fixed) for the entirety of the term you choose. Fixed rate mortgages are available in 1, 2, 3, 4, 5, 7 & 10 year terms.
The interest rate on a variable or adjustable rate mortgage is subject to change. If the Bank of Canada decides to adjust interest rates in Canada, then those who have a variable or adjustable rate mortgage will experience a rate change on their mortgage. (Read the question below this one for an explanation on how that works).
The main advantage of fixed rate mortgages is the fact that the borrower is safe from any rate increases during the term they choose which makes financial planning much easier.
One disadvantages to fixed rate mortgages is that if interest rates decrease, you may be stuck paying your higher interest rate for the duration of your term. You may be able to switch from one fixed rate mortgage to another one with a lower interest rate but there would be some costs involved. Depending on what the costs are and what interest rate options you have available to switch to, it may not make sense to make the change.
Another disadvantage to fixed rate mortgages is the way penalties are calculated if you needed to break the mortgage contract early (before the maturity date). In many cases, the penalties on fixed rate mortgages are higher than the penalties charged when breaking a variable or adjustable rate mortgage contract. You can read all about mortgage penalties by clicking here.