The Fixed vs. Variable Decision
If you’re shopping for a mortgage, one of the most important decisions you’ll face is whether to choose a fixed or variable interest rate. It’s a question that sparks plenty of debate, and honestly, there’s no universally right answer.
Understanding Fixed Rate Mortgages
With a fixed rate mortgage, your interest rate is locked in for the entire term of your mortgage. If you get a five-year fixed mortgage at 4.79%, you’ll pay 4.79% for all five years, regardless of what happens to interest rates in the broader market.
This predictability is the core appeal of fixed rate mortgages. Your monthly payment stays exactly the same from your first payment to your last. You can budget with confidence.
The Advantages of Fixed Rates
- Predictability: You know exactly what you’ll pay every month
- Protection: You’re insulated if rates rise during your term
- Peace of mind: You can set it and forget it
The Downsides of Fixed Rates
- Higher starting rate: Fixed rates are typically higher than variable rates
- Larger prepayment penalties: Breaking a fixed mortgage early can be expensive
- Less flexibility: You can’t benefit if rates drop
Understanding Variable Rate Mortgages
Variable rate mortgages have interest rates that fluctuate based on the lender’s prime rate, which in turn is influenced by the Bank of Canada’s policy rate. Your rate is typically quoted as “prime minus” or “prime plus” a certain percentage.
The Advantages of Variable Rates
- Lower starting rate: You often begin with a lower rate than fixed
- Smaller penalties: Prepayment penalties are usually just three months’ interest
- Historical advantage: Over long periods, variable rates have often cost less
The Downsides of Variable Rates
- Uncertainty: Your rate can increase during your term
- Payment changes: Some variable mortgages adjust your payment when rates change
- Stress: Rate movements can be anxiety-inducing
How to Decide: Key Questions to Ask Yourself
What’s your risk tolerance? If the thought of your rate increasing keeps you up at night, fixed is probably better for you. If you can handle some uncertainty in exchange for potential savings, variable might be worth considering.
What’s your financial cushion? If your budget is tight and a payment increase would cause real hardship, the certainty of a fixed rate provides important protection.
How long will you keep this mortgage? If there’s a chance you’ll move, refinance, or make large prepayments before your term ends, the lower prepayment penalties of a variable rate might save you money.
Making Your Decision
We help clients work through this decision every day. We’ll look at your specific financial situation, discuss your goals, and help you understand the trade-offs. Call us at 416-822-7357 for a consultation.