Choosing between a fixed or variable rate mortgage is one of the biggest decisions you'll make when financing your home. Both have their pros and cons, and the right option really comes down to your comfort level, goals, and plans over the next few years. Here’s a clear breakdown to help you decide what fits best.
Fixed Rate Mortgages
- Your interest rate and monthly payment stay the same for the entire term
- Based on Government of Canada bond yields, not the Bank of Canada’s overnight rate
- Offers predictability and peace of mind - you won’t be affected by rate hikes
- Easier to budget with consistent payments, especially helpful for first-time buyers or those on a fixed income
- Higher penalties if you break the mortgage early (calculated as the greater of 3 months’ interest or an Interest Rate Differential)
- Often come with portability options: if you sell and buy a new home, you may be able to port your rate, or blend and extend to a new term
- Ideal if you want stability, plan to stay in your home for the full term, or are risk-averse
Variable Rate Mortgages
- Your rate can move up or down during the term, depending on changes to your lender's prime rate
- Prime rate is influenced by the Bank of Canada’s decisions, which are often based on inflation and overall economic trends
- Some variable mortgages have fixed payments (more goes to interest if rates rise), while others have payments that adjust with the rate
- Typically offer more flexibility and a lower penalty if you need to break your mortgage (usually just 3 months' interest)
- Many allow you to convert to a fixed rate mid-term without penalty, locking in for the remainder of your term
- Portability is more limited - most variable rate mortgages do not allow you to port the rate to a new property, so you would need to break the mortgage and potentially lose your rate
- Suitable if you’re comfortable with rate fluctuations, have room in your budget, or plan to sell or refinance before the end of your term
Which One Should You Choose?
- Go fixed if you want predictable payments, are working with a tight budget, or don’t want to worry about rate hikes
- Go variable if you’re comfortable with some uncertainty, have the flexibility in your cash flow, or want to keep your options open
- Thinking short-term? If you might move, refinance, or break your mortgage early, consider a variable rate or a shorter fixed term to help avoid large penalties
- Not sure which way to go? Ask about the ability to switch from variable to fixed if market conditions change
There’s no perfect answer - only what works best for you. If you're feeling unsure, reach out. I'll walk you through the pros and cons based on your goals and help you feel confident in your choice.