Choosing between a fixed and variable mortgage rate isn’t about predicting interest rates perfectly.
It’s about choosing the level of payment stability, flexibility, and risk that fits your situation.
The lowest rate is not automatically the best mortgage option.
Your decision should also consider your cash flow, plans for the property, risk tolerance, potential penalties, and how quickly you want to pay off your mortgage.
It’s about choosing the level of payment stability, flexibility, and risk that fits your situation.
The lowest rate is not automatically the best mortgage option.
Your decision should also consider your cash flow, plans for the property, risk tolerance, potential penalties, and how quickly you want to pay off your mortgage.
fixed vs. variable: the quick comparison
Feature |
Fixed Rate |
Variable Rate |
Adjustable Rate |
Interest Rate |
Stays the same during the term |
Changes when the lender’s prime rate changes |
Changes when the lender’s prime rate changes |
Payment Amount |
Stays the same |
Stays the same unless rates climb too high |
Changes when rates change |
Budget Predictability |
High |
Moderate |
Lower |
Main Risk |
Potentially higher break penalties |
Amortization may increase if rates rise |
Payments may increase if rates rise |
**The exact features depend on the lender and mortgage product. It’s important to review the specific terms before making a decision.
How Does a Fixed-Rate Mortgage Work?
With a fixed-rate mortgage, your interest rate stays the same for the entire mortgage term you choose.
Fixed mortgage terms in Canada commonly range from one to five years, although some lenders offer longer terms.
The main advantage: payment stability
A fixed mortgage can make budgeting easier because your regular mortgage payment stays the same throughout the term.
This can be appealing if:
The potential disadvantages
If interest rates fall after you choose a fixed mortgage, you may be committed to your higher rate until the term ends.
You may be able to break the mortgage and refinance at a lower rate, but this could result in a significant prepayment penalty.
Fixed-rate mortgage penalties are often calculated using the greater of:
The exact calculation depends on your lender, mortgage contract, remaining term, mortgage balance, and current rates.
This is one reason it’s important to understand the penalty provisions before choosing a fixed mortgage.
Fixed mortgage terms in Canada commonly range from one to five years, although some lenders offer longer terms.
The main advantage: payment stability
A fixed mortgage can make budgeting easier because your regular mortgage payment stays the same throughout the term.
This can be appealing if:
- You prefer predictable payments
- Your budget has limited flexibility
- A potential payment increase would create financial stress
- You want protection from rising interest rates
- You plan to keep the mortgage for the entire term
The potential disadvantages
If interest rates fall after you choose a fixed mortgage, you may be committed to your higher rate until the term ends.
You may be able to break the mortgage and refinance at a lower rate, but this could result in a significant prepayment penalty.
Fixed-rate mortgage penalties are often calculated using the greater of:
- Three months’ interest, or
- An interest rate differential penalty
The exact calculation depends on your lender, mortgage contract, remaining term, mortgage balance, and current rates.
This is one reason it’s important to understand the penalty provisions before choosing a fixed mortgage.
How Does a Variable-Rate Mortgage Work?
With most lenders, a variable-rate mortgage is tied to the lender’s prime lending rate.
The rate is usually expressed as prime plus or minus a certain percentage.
For example:
Prime - 0.80%
Prime + 0.50%
If the lender’s prime rate changes, the interest rate on your mortgage changes as well.
With variable mortgages, your payment stays the same while the amount applied to interest and principal changes.
If rates increase:
If rates decrease:
Some lenders may adjust the payment once the mortgage reaches a predetermined trigger point. The specific rules are different from one lender to another.
The rate is usually expressed as prime plus or minus a certain percentage.
For example:
Prime - 0.80%
Prime + 0.50%
If the lender’s prime rate changes, the interest rate on your mortgage changes as well.
With variable mortgages, your payment stays the same while the amount applied to interest and principal changes.
If rates increase:
- More of your payment goes toward interest
- Less goes toward principal
- Your mortgage may take longer to pay off
If rates decrease:
- Less of your payment goes toward interest
- More goes toward principal
- You may pay off the mortgage sooner
Some lenders may adjust the payment once the mortgage reaches a predetermined trigger point. The specific rules are different from one lender to another.
How Does an Adjustable-Rate Mortgage Work?
An adjustable-rate mortgage also changes when the lender’s prime rate changes.
The key difference is that the payment amount changes when interest rates change.
If rates increase, your payment will increases.
If rates decrease, your payment will decreases.
This can make an adjustable-rate mortgage more responsive to changes in the market, but it also means your monthly payment may be less predictable.
An adjustable-rate mortgage may suit someone who:
The key difference is that the payment amount changes when interest rates change.
If rates increase, your payment will increases.
If rates decrease, your payment will decreases.
This can make an adjustable-rate mortgage more responsive to changes in the market, but it also means your monthly payment may be less predictable.
An adjustable-rate mortgage may suit someone who:
- Has room in their monthly budget
- Can handle payment fluctuations
- Wants the flexibility associated with a variable-rate product
- Understands and accepts the risk of rising payments
- Wants to ensure their mortgage remains on track to be paid off within a certain timeframe
Which Is Better: Fixed or Variable?
There is no universal answer.
A fixed mortgage may be appropriate if payment stability is your highest priority.
A variable or adjustable mortgage may be appropriate if you have more flexibility in your budget and are comfortable accepting changes in your interest rate or payment.
Your decision should consider more than the rate available today.
Ask yourself:
The right answer depends on your situation and your plans.
A fixed mortgage may be appropriate if payment stability is your highest priority.
A variable or adjustable mortgage may be appropriate if you have more flexibility in your budget and are comfortable accepting changes in your interest rate or payment.
Your decision should consider more than the rate available today.
Ask yourself:
- How stable is your income?
- How much room is there in your monthly budget?
- How would you handle a payment increase?
- How long do you expect to own the property?
- Might you sell or refinance before the term ends?
- How important is flexibility to you?
- What are the penalties if you need to break the mortgage?
- How quickly do you want to pay off the mortgage?
The right answer depends on your situation and your plans.
Don’t Forget About Mortgage Penalties
A mortgage can look attractive based on its rate but become expensive if you need to break it early.
You may need to break or refinance your mortgage if you:
Most variable- and adjustable-rate mortgages have penalties based on three months’ interest so they are usually less expensive to break than fixed-rate mortgages.
Fixed-rate mortgages may have higher penalties depending on the lender’s interest rate differential calculation.
The lowest rate is not always the lowest-cost mortgage.
You may need to break or refinance your mortgage if you:
- Sell your home
- Buy an additional property and need to access equity from your current home
- Refinance to consolidate debt or access home equity
- Change lenders before maturity
- Make a significant change to your mortgage structure
Most variable- and adjustable-rate mortgages have penalties based on three months’ interest so they are usually less expensive to break than fixed-rate mortgages.
Fixed-rate mortgages may have higher penalties depending on the lender’s interest rate differential calculation.
The lowest rate is not always the lowest-cost mortgage.
Summary
Fixed mortgages provide stability and predictable payments.
Variable and adjustable mortgages provide more flexibility and may offer interest savings, but they require you to accept potentially changing rates and, in some cases, changing payments.
Neither option is automatically better.
The right choice depends on your income, cash flow, risk tolerance, plans for the property, and long-term financial goals.
When the time comes to arrange your mortgage, we can compare the available options.
Variable and adjustable mortgages provide more flexibility and may offer interest savings, but they require you to accept potentially changing rates and, in some cases, changing payments.
Neither option is automatically better.
The right choice depends on your income, cash flow, risk tolerance, plans for the property, and long-term financial goals.
When the time comes to arrange your mortgage, we can compare the available options.
