Choosing a mortgage rate is an important financial decision for Canadian homebuyers and homeowners. Two of the most common options are fixed and variable mortgage rates. Each option has different features, benefits, and potential risks, so the right choice depends on your budget, financial goals, and comfort with changing interest rates.
A fixed mortgage rate provides greater payment predictability, while a variable mortgage rate can change during the mortgage term. Understanding how both options work can help you make a more informed decision when purchasing a home, refinancing, or renewing your mortgage.
If you are comparing fixed vs variable mortgage rates, it is important to look beyond the advertised rate. Your mortgage term, payment structure, prepayment privileges, penalties, and plans can all affect which option is more suitable for you.
Fixed vs Variable Mortgage Rates: What’s the Difference?
The main difference between fixed and variable mortgage rates is how the interest rate can change during your mortgage term.
With a fixed-rate mortgage, your interest rate remains the same for the agreed term. This generally makes it easier to predict your mortgage payments and plan your household budget.
With a variable-rate mortgage, the interest rate can change during the term based on changes to the rate used to determine your mortgage pricing. Depending on the mortgage structure, changes in the rate may affect your payment amount, the amount of each payment going toward interest, or the time required to pay off the mortgage.
Neither option is automatically better for every borrower. The right choice depends on your financial circumstances and how comfortable you are with potential changes in borrowing costs.
What Is a Fixed Mortgage Rate?
A fixed mortgage rate means your interest rate is set for the duration of your mortgage term. For example, if you choose a five-year fixed mortgage, the rate generally stays unchanged throughout that five-year term, subject to the terms of your mortgage agreement.
How Fixed Mortgage Rates Work
Your mortgage payment is based on factors such as your loan amount, amortization period, interest rate, and payment frequency. Since the interest rate remains fixed during the term, your scheduled principal and interest payments are generally predictable.
This can make a fixed mortgage attractive to borrowers who prefer stability and want to know what to expect from their regular mortgage payments.
Benefits of a Fixed Mortgage
A fixed mortgage can offer several advantages:
- Payment predictability: Your interest rate remains unchanged during the term.
- Easier budgeting: Consistent payments can make household budgeting simpler.
- Protection from rising rates: Your contracted rate is generally protected from increases during the term.
- Greater certainty: You do not have to make decisions based on every change in interest rates.
For borrowers with a limited monthly budget, this predictability can be particularly valuable.
Potential Drawbacks of a Fixed Mortgage
Fixed mortgages also have potential disadvantages. A fixed rate may not provide the same benefit if market rates decrease significantly during your term. You generally continue paying the rate specified in your mortgage agreement until renewal or another permitted change.
Some fixed mortgages may also have higher penalties for breaking the mortgage early compared with certain variable-rate products. The actual penalty depends on the lender and the terms of your mortgage.
What Is a Variable Mortgage Rate?
A variable mortgage rate can change during the mortgage term. The rate is typically connected to a lender’s prime rate or another benchmark, with the specific calculation determined by your mortgage agreement.
For example, a lender may offer a variable mortgage at a specified relationship to its prime rate. If the underlying rate changes, your mortgage rate may also change.
How Variable Mortgage Rates Work
Variable mortgages can respond to changes in interest rates throughout the term. Your regular payment may change when the rate changes, or the payment may remain the same for a period while the amount going toward principal and interest changes.
Because mortgage structures differ between lenders, it is important to understand exactly how a particular variable mortgage responds to rate changes before signing an agreement.
Benefits of a Variable Mortgage
A variable mortgage may appeal to borrowers who are comfortable with some uncertainty.
Potential advantages include:
- The possibility of benefiting when interest rates decrease
- Potentially competitive starting rates in certain market conditions
- Flexibility for borrowers who can manage changes in borrowing costs
- An opportunity to benefit from falling rates without waiting until mortgage renewal
However, these potential benefits are not guaranteed. A variable mortgage can also become more expensive if interest rates rise.
Potential Drawbacks of a Variable Mortgage
The biggest consideration is uncertainty. Your mortgage rate can change during the term, which may increase your borrowing costs.
If your budget is already tight, even a moderate increase in your mortgage payment could create financial pressure. Borrowers considering a variable mortgage should therefore think about how they would manage higher payments if rates increased.
Fixed vs Variable Mortgage: Key Differences
| Feature | Fixed Mortgage | Variable Mortgage |
| Interest rate | Generally stays the same during the term | Can change during the term |
| Payment predictability | Generally higher | Can be less predictable |
| Protection from rising rates | Greater protection | More exposure to rate increases |
| Benefit from falling rates | Usually limited during the term | Potentially benefits from lower rates |
| Budgeting | Easier for predictable payments | Requires more financial flexibility |
| Rate risk | Lower during the term | Higher |
| Suitable for | Borrowers prioritizing certainty | Borrowers comfortable with fluctuations |
The important point is that the lowest rate is not necessarily the best mortgage option. A borrower should consider the complete mortgage package, including the rate, terms, penalties, prepayment privileges, and flexibility.
Fixed vs Variable Mortgage Rates: Which Is Better?
There is no single answer to whether a fixed or variable mortgage is better. Your personal financial situation should play a major role in the decision.
A Fixed Rate May Make Sense If…
A fixed mortgage may be worth considering if you:
- Prefer predictable mortgage payments
- Have a strict monthly budget
- Want protection against rising interest rates
- Prefer financial certainty
- Do not want to monitor rate changes during your mortgage term
For example, a household with several fixed monthly expenses may prefer the certainty of knowing its mortgage rate will remain unchanged during the term.
A Variable Rate May Make Sense If…
A variable mortgage may be worth considering if you:
- Have enough financial flexibility to manage rate increases
- Are comfortable with fluctuations in borrowing costs
- Understand the risks associated with changing rates
- Want the potential benefit of lower rates during the term
- Have a financial plan that can accommodate changing payments
The decision should be based on your ability to manage risk rather than simply trying to predict where interest rates will go next.
Also Read: How Can Newcomers to Canada Qualify for a Mortgage?
Factors to Consider Before Choosing a Mortgage Rate
Before choosing between a fixed and variable mortgage, consider more than the initial interest rate.
Your Monthly Budget
Start by looking at how much room you have in your monthly budget. If an increase in your mortgage payment would make it difficult to manage your other expenses, a more predictable payment structure may be preferable.
If you have more flexibility, you may be better positioned to consider a variable mortgage.
Your Risk Tolerance
Your comfort with financial uncertainty matters. Some homeowners prefer certainty and are willing to pay for the stability of a fixed rate. Others are comfortable with fluctuations if there is potential for savings.
Understanding your own risk tolerance can make the decision easier.
Current Mortgage Rates
Mortgage rates can change over time, and different lenders may offer different rates and mortgage features.
Instead of choosing based solely on the advertised rate, compare the complete mortgage product. Look at the rate, term, payment structure, penalties, prepayment privileges, and other conditions.
Your Mortgage Term
The length of your mortgage term can also influence your decision.
Consider how long you expect to keep the mortgage and what may happen during that period. A borrower planning to sell or refinance before the end of the term should pay particular attention to the costs associated with breaking the mortgage.
Prepayment and Breakage Penalties
Mortgage flexibility can be just as important as the interest rate.
Before signing, review:
- Prepayment privileges
- Early payout conditions
- Mortgage break penalties
- Portability options
- Conversion options, where applicable
- Refinancing conditions
These features can affect the overall cost of your mortgage if your circumstances change.
Your Future Plans
Think about what you expect to happen during the mortgage term.
Are you planning to move? Do you expect your income to change? Could you need to refinance? Are you planning to make additional mortgage payments?
Your answers can help determine how much flexibility you may need from your mortgage.
Fixed vs Variable Mortgage Rates at Renewal
Mortgage renewal is an opportunity to reassess your financing rather than simply accepting the renewal offer from your current lender.
Before renewing, review your current mortgage and consider whether your financial situation has changed. Your income, expenses, home value, outstanding mortgage balance, and future plans may all be different from when you originally arranged your mortgage.
You can compare both fixed and variable options and review the available terms. It may also be worthwhile to compare offers from different lenders rather than automatically renewing with your existing lender.
A mortgage professional can help you understand your options and identify mortgage features that may better suit your current circumstances.
How a Mortgage Broker Can Help You Compare Fixed and Variable Rates
Comparing mortgage options can be complicated, especially when lenders use different rate structures, terms, and conditions.
A mortgage broker can help you review available options and understand how different mortgage products may fit your financial situation.
At AKAL Mortgages Inc., the focus should be on helping borrowers understand their choices rather than simply selecting a rate based on a single number. A mortgage professional can help you compare fixed and variable options, review mortgage terms, discuss prepayment privileges, and consider your short- and long-term financial goals.
Getting professional guidance can help you make a decision based on your circumstances instead of trying to predict future interest rate movements.
Frequently Asked Questions About Fixed vs Variable Mortgage Rates
Is a fixed or variable mortgage better in Canada?
Neither option is automatically better for everyone. A fixed mortgage may be more suitable for borrowers who value predictable payments, while a variable mortgage may suit borrowers who are comfortable with rate fluctuations and potential changes in borrowing costs.
What is the main difference between fixed and variable mortgage rates?
A fixed mortgage rate generally remains unchanged throughout the mortgage term. A variable mortgage rate can change during the term based on the rate structure outlined in the mortgage agreement.
Can a variable mortgage rate increase?
Yes. A variable mortgage rate can increase when the underlying rate or lender’s pricing changes. Borrowers should understand how rate increases would affect their payments or mortgage amortization.
Can I switch from a variable mortgage to a fixed mortgage?
Depending on the lender and mortgage agreement, a variable mortgage may be convertible to a fixed-rate mortgage. The conditions, available rates, and requirements can vary, so it is important to review the specific mortgage terms.
Is a variable mortgage always cheaper than a fixed mortgage?
No. A variable mortgage may offer a lower rate at certain points, but the rate can increase during the term. The total cost depends on how rates change and the specific terms of the mortgage.
Which mortgage is better for budgeting?
A fixed-rate mortgage generally offers greater payment predictability during the term. This can make budgeting easier for borrowers who prefer to know their mortgage payment.
Should I choose a fixed or variable rate when renewing my mortgage?
Consider your current financial situation, monthly budget, risk tolerance, plans, and the available mortgage rates and terms. Comparing both options before renewal can help you make a more informed decision.
Can a mortgage broker help me choose between fixed and variable rates?
Yes. A mortgage broker can help you compare available mortgage products, explain rate structures and terms, and help you evaluate options based on your financial goals.
Make an Informed Mortgage Rate Decision
Choosing between a fixed and variable mortgage rate is about more than finding the lowest advertised rate. It is about finding a mortgage structure that fits your budget, financial goals, risk tolerance, and plans.
A fixed mortgage can provide greater payment certainty, while a variable mortgage offers the potential to benefit from changing rates but comes with greater uncertainty. Reviewing the complete mortgage terms can help you understand the potential benefits and risks of each option.
Not sure which mortgage rate is right for you? Contact AKAL Mortgages Inc. to compare mortgage options and get guidance tailored to your financial goals.