Understanding Mortgages
Both options can make sense. The better choice depends on how much stability, flexibility, and interest-rate uncertainty you are comfortable with.
At a Glance
The main difference is whether your interest rate stays fixed for the term or moves with the lender’s prime rate.
Your interest rate is set for the mortgage term.
Your interest rate can change when the lender’s prime rate changes.
Example
Imagine two homeowners are offered a fixed mortgage and a variable mortgage.
The first homeowner has a tight monthly budget and would find a payment increase stressful. They value knowing what their mortgage payment will be, so a fixed mortgage may feel more comfortable.
The second homeowner has room in their budget, understands that rates may change, and may sell or refinance before the end of the term. They may place more value on the potential flexibility of a variable mortgage.
Neither borrower is automatically making the better decision. They are choosing based on different priorities.
Planning Insight
Choosing between fixed and variable is not simply about finding the lowest rate available today.
The mortgage should also reflect your budget, comfort with changing payments, and how likely you are to make changes before the term ends.
Fixed Rate
With a fixed mortgage, your interest rate is set for the entire mortgage term. If you choose a five-year fixed mortgage, the rate remains the same for those five years.
Your required principal-and-interest payment will generally remain consistent during the term, provided you do not make changes to the mortgage.
This predictability can make budgeting easier because market rate changes will not affect your mortgage rate until the end of the term.
Variable Rate
A variable mortgage is usually priced in relation to the lender's prime rate. Your mortgage agreement may describe the rate as prime minus or plus a certain percentage.
If the lender's prime rate changes, the interest rate on your mortgage will also change.
Depending on the mortgage product, your required payment may change when rates move. With some variable mortgages, the payment may initially remain the same while the amount going toward interest and principal changes.
Rate Drivers
Fixed and variable mortgage rates are influenced by different parts of the interest-rate market.
Variable mortgage rates are generally tied to a lender's prime rate. Each lender sets its own prime rate, although prime rates are heavily influenced by changes to the Bank of Canada's policy rate.
Fixed mortgage rates are influenced more by bond-market pricing and a lender's cost of funding. The 5-year Government of Canada bond yield is one of the indicators commonly watched when looking at pressure on 5-year fixed mortgage rates.
That does not mean fixed rates move exactly with bond yields, or that every lender changes rates at the same time.
See the current mortgage rate signalsChanging Rates
With a fixed mortgage, market rate changes do not affect your mortgage payment during the term.
With a variable mortgage, the effect depends on the product. Some variable mortgages have payments that increase or decrease when rates change.
Other products may keep the payment stable for a period of time. When rates rise, more of the payment goes toward interest and less goes toward reducing the mortgage balance.
In some cases, a significant rate increase can require a payment adjustment. It is important to understand exactly how the mortgage works before choosing it.
Mortgage Penalties
The cost of ending a mortgage before the term is complete can vary considerably.
A fixed mortgage penalty is commonly calculated using either three months of interest or an interest-rate differential, depending on the lender and mortgage agreement.
A variable mortgage penalty is often based on three months of interest, but mortgage contracts and lender policies can differ.
This can matter if you may sell your home, refinance, separate, relocate, or otherwise need to change your mortgage before the term ends.
Before You Decide
Start by thinking beyond the interest rate being offered today.
A variable mortgage should still fit your budget if rates move higher.
Some homeowners prefer knowing their rate and payment will not change during the term.
Consider whether you may move, refinance, or need to restructure the mortgage before the term ends.
The penalty calculation can be just as important as the interest rate.
Some lenders allow borrowers to convert into a fixed mortgage, but the available rate and remaining term conditions should be understood.
The Bigger Picture
A lower starting rate may be attractive, but it should not be the only reason you choose a mortgage.
Features such as prepayment privileges, portability, penalty calculations, conversion options, and restrictions can all affect the true value of a mortgage.
Compare mortgage paymentsFrequently Asked
Clear answers to some of the most common questions about this topic.
A fixed mortgage offers more interest-rate and payment certainty. Whether it is the better choice depends on your budget, plans, and comfort with changing rates.
Not always. Some variable mortgages have adjustable payments, while others may keep the payment stable for a period of time and change how much goes toward principal and interest.
Some lenders allow a variable mortgage to be converted into a fixed mortgage. The available fixed rate, term, and conditions will depend on the lender and mortgage agreement.
Variable mortgage penalties are often based on three months of interest. Fixed mortgage penalties may use either three months of interest or an interest-rate differential. The exact calculation depends on the lender and contract.
No. A variable mortgage may cost less during some periods and more during others. Future interest-rate movements cannot be known in advance.
Not necessarily. The rate matters, but penalties, prepayment options, portability, restrictions, and how well the mortgage fits your plans also matter.
Helpful Tool
Use the Mortgage Payment Calculator to compare how different interest rates, mortgage amounts, payment frequencies, and amortizations may affect your payment.
What to Explore Next
Here are a few related answers, guides, and tools that may help you take the next step.
Mortgage Minute
Understand what a mortgage pre-approval can tell you and what it does not guarantee.
Mortgage Minute
See how income, debts, interest rates, property taxes, and other housing costs affect affordability.
Mortgage Guide
Understand what to review before renewing and why your lender’s first offer may not be your only option.
Personal Guidance
Choosing between fixed and variable is personal. I would be happy to walk you through how each option could affect your payment, flexibility, and plans so you can compare the choices based on what matters to you.
Need a Second Opinion?
I can help you work through the numbers and the next step.
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