Fixed vs. Variable Mortgages: A Simple Guide

When you’re shopping for a home loan, you’ll make a key choice: a fixed-rate or a variable-rate (adjustable) mortgage. Both have pros and cons. Understanding the differences will help you pick what fits your budget, goals, and comfort with risk.

Fixed-Rate Mortgages (What They Are)

With a fixed-rate mortgage, your interest rate and monthly payment stay the same for your full term. That predictability makes budgeting easier and protects you from market swings.

Benefits of Fixed-Rate Mortgages

• Easier budgeting: Your payment is the same each month, which makes planning simple.
• Stable payments: It’s clear how much goes to principal vs. interest, so you can map out payoff timelines.

Risks of Fixed-Rate Mortgages

• Starting rate: Fixed mortgages often begin with higher interest rates than variable ones.
• Less flexibility: If market rates fall, you only benefit by refinancing, which may involve fees.
• Prepayment penalties: Ending your term early can mean large fines, often based on the Interest Rate Differential (IRD).

Variable-Rate Mortgages (What They Are)

Variable rates move with a lender’s prime rate, which changes with economic conditions and inflation outlooks. Payments (or amortization) can change when prime moves. You can save when rates drop, but there’s less certainty.

Benefits of Variable-Rate Mortgages

• Potential savings: Variable mortgages usually start with lower interest rates than fixed ones.
• Flexibility: Many allow extra payments, faster payoff, or converting to a fixed rate later.
• Lower penalties: If you break a variable term, fees are often smaller (commonly three months’ interest).

Risks of Variable-Rate Mortgages

• Uncertainty: If rates rise, your cost can rise too, which may strain your budget.
• Less predictability: Changing rates make long-term planning harder.
• Conversion cost: If you switch to fixed when market rates are higher, your new fixed rate will also be higher.

How to Choose: Fixed vs. Variable

• Budget stability: If you want predictable payments, fixed is safer.
• Market view: Variable can make sense when rates are very low or expected to drop; fixed can protect you if rates may rise.
• Risk tolerance: Comfortable with swings? Variable could work. Prefer certainty? Choose fixed.
• Time horizon: Moving/refinancing soon? Variable may be fine. Staying long-term? Fixed offers consistency.

Switching Later (Converting Your Rate)

• Variable → Fixed: Many lenders let you lock in during your term or at renewal (ask about timing and any costs).
• Fixed → Variable: Possible at renewal; mid-term changes depend on your lender’s rules and fees.

Negotiating a Better Rate

Rates follow the market, but you can still try to negotiate for a better deal:

• Compare offers: Get quotes from multiple lenders.
• Strengthen your file: Good credit, steady income, manageable debts, and a solid down payment help.
• Use relationships: Ask your bank about loyalty discounts.
• Ask for a match: If you find a lower rate elsewhere, see if they’ll match or beat it.
• Work with a mortgage broker: Brokers have access to many lenders and can often secure better rates or terms than going directly to one bank.

Prepayments & Penalties

• Prepayments: Extra payments (within your privilege limits) reduce interest and help you finish faster. Check your contract for annual/periodic limits.
• Penalties for breaking: Fixed terms often use IRD (can be costly). Variable terms are usually three months’ interest.
• Open vs. closed: Open mortgages allow full prepayment anytime (higher rates). Closed mortgages have limits (lower rates).

Types of Fixed & Variable Mortgages

• Open fixed: Fixed rate with freedom to pay off or switch anytime (usually higher rate).
• Closed fixed: Locked rate and payment for the term; limits on extra payments; penalties if you break early.
• Open variable: Rate moves with prime; you can pay off or change anytime without penalty (usually higher rate than closed).
• Closed variable: Rate moves with prime; limits on extra payments; lower rate than open; penalties apply if you break.

How Prime Rate Affects Variable Mortgages

• Prime moves: Driven by the economy and inflation expectations. Variable rates rise or fall as prime changes.
• Payment impact: When prime drops, more of your payment may go to principal; when it rises, more goes to interest.
• Rate caps: Some lenders offer caps (a maximum rate) to limit how high your rate can go.

Frequently Asked Questions

Which is better: fixed or variable?

It depends on you. If you value certainty, choose fixed. If you’re comfortable with some risk to potentially save money, variable can work.

What are the downsides of a variable-rate mortgage?

Rates can rise. That can increase your cost and make budgeting harder. Make sure your finances can handle potential payment changes.

Will my payment change with a variable mortgage?

It depends on the product. Some variable mortgages change your payment when prime moves. Others keep the payment the same and adjust the amortization. Ask which type you’re being offered.

How often do variable rates change?

Variable mortgage rates change when your lender’s prime rate changes. The prime rate usually moves after the Bank of Canada updates its policy interest rate. The Bank of Canada has 8 scheduled rate announcements each year (about every 6 weeks), though it can also act outside those dates in unusual circumstances. So, while changes aren’t monthly or automatic, they typically happen on these announcement dates when the Bank adjusts its rate.

Can I switch from variable to fixed later?

Often, yes. Many lenders let you lock in during your term. Your new fixed rate will be the lender’s rate on the day you switch.

What if rates go up and I’m worried?

Consider locking into a fixed rate, increasing your payments (within your prepayment limits), or making lump-sum prepayments to stay on track.

Are penalties different for fixed vs. variable?

Usually yes. Fixed terms often use IRD (can be higher). Variable terms are commonly three months’ interest.

Conclusion

Fixed rates offer stability and simple budgeting. Variable rates can save money when prime is flat or falling, but they add uncertainty. Think about your budget, how long you’ll keep the mortgage, your comfort with risk, and today’s market. Review prepayment options and penalties in your contract, and don’t hesitate to get advice so you can choose the option that fits you best.