Mortgage Blog

Should you go with a fixed or variable mortgage rate?

April 11, 2022 | Posted by: Simon Lyn

For any new home owner, deciding between a variable versus fixed rate is one of the biggest, and sometimes most nerve wracking, choices a borrower will make about their mortgage. That’s because it could end up being the difference between thousands of dollars of interest and potential penalties if you decide to break the mortgage before the term is up.

In this article, we’ll take you through the differences between a fixed versus variable mortgage rate, and the pros and cons of each so that you are better informed to make the right choice for your situation.

What is a fixed mortgage rate

With a fixed mortgage, your interest rate and payment stay the same throughout the entire mortgage term

Pros: 

• A fixed rate essentially allows you to have peace of mind in knowing that regardless of whether rates rise or fall, your rate won’t be impacted.  
• Since the interest rate stays the same, you will always know how much to budget, and how long it will take to pay off the mortgage.

Cons: 

• If the fixed rate is significantly higher than the variable rate, it may not be worth paying a premium just so that you have predictable budgeting over the course of the term. 
• If you decide to break your mortgage early, you could end up paying tens of thousands of dollars in penalties. 

What is a variable mortgage rate

With a variable mortgage, your mortgage payment stays the same throughout your mortgage term, but the interest rate can go up and down with the market interest rate, aka the prime interest rate. This means that sometimes your monthly payment might be contributing more towards paying off the interest versus the principal, or vice versa. For example, the Bank of Canada is expected to raise its overnight interest rate by 50 basis points at its next policy meeting on April 13, 2022. With a variable rate mortgage, the monthly payments would increase by $26.51 per $100,000.

Pros:

• The initial interest rate is often lower than a fixed mortgage. Based on historical data, variable rates have proven to be less expensive than fixed rates over time. 
• If you break your mortgage, you will generally only need to pay three months worth of interest versus higher penalties with a fixed rate. 
• If the prime rate falls, your interest rate falls accordingly and more of your payments go towards the principal.
• You can convert to a fixed mortgage rate at any time.

Cons: 

• There is financial uncertainty because significant increases in the prime rate will increase the amount of interest you pay, which can be a financial burden and extend the amortization period.

So which type of mortgage should you go with?

If the financial uncertainty of a variable mortgage doesn’t scare you, it might be a better choice to go with the variable option if the variable rate is significantly lower than the fixed rate. You potentially save a lot of money if the variable rate continues to stay low throughout your term. However, if you want the certainty in knowing your mortgage payment will stay the same and won’t be impacted by movements in prime rates, then a fixed-rate mortgage is your best choice.

Whichever way you decide to go, remember that you can change your mortgage rate type at the end of your term when you renew your mortgage, and if you go with a variable, some lenders allow you to convert to a fixed rate during your initial term. There will always be risk associated with borrowing money from lenders, so your best defense is being as informed as possible before making your decision.

For expert advice on how to determine which type of mortgage is the best option for you, book a consultation with us and we’ll be happy to help. 

Simon Lyn
Mortgage Broker, Managing Partner 
Bespoke Mortgage Group 
License #12729 

Back to Main Blog Page