Variable vs Fixed Mortgage Rates

You've come to a mortgage fork in the road. So which rate is best for you?

When thinking about buying a home or renewing your mortgage, one of the first questions asked is the difference between a variable-rate mortgage and a fixed-rate mortgage. The choice can be personal, and tied not only to your financial situation, but also to your comfort level with changing rates and payments.

For the riskier-at-heart, a variable rate helps take more advantage of the current low historical rates. For those wanting more stability, a fixed-rate, while a bit higher, can provide a safer option to protect against rate increases.

Typically, a majority of home buyers select fixed-rate mortgages (around 60%), while a (still-significant) minority go with a variable one (around 30%). And, younger clients tend to choose fixed, whereas older clients lean towards variable. That makes sense, considering the risk levels of both groups (first home vs. more home-equity built up).

Let's look at some pros and cons below. Or, read more about what's behind these different rate types.

Right now, variable rates are at rock-bottom, while fixed rates have increased.

Why choose a fixed rate mortgage?

The interest rate on a fixed-rate mortgage is locked in for a specific term length, anywhere between 6 months to 10 years. A fixed rate offers the security of knowing what you'll be paying for during your term (a longer term typically offers a lower rate).

The pros of a Fixed Rate Mortgage:

• Rate is set for the duration of your mortgage term
• Payments won't change, making it easier to budget
• Because the payments are set, the amount paid down on principal during the term is pre-determined
• If rates go up, you're protected during your current term
• Fixed rate terms are usually portable (can go from current property to a new property)

The cons of a Fixed Rate Mortgage:

• May come with higher penalties (Interest Rate Differential (IRD) or 3 months interest, whichever is greater)
• Historically, fixed rates are higher than variable rates
• If mortgage interest rates go down, you'll need to refinance or wait for your renewal to take advantage

For many of our True North Mortgage clients, the 5-year fixed rate is popular for first time home buyers, for those who are rate sensitive or risk adverse, and for those who prefer to stick to a monthly budget so that their payments don't fluctuate.

Related: How Government Bond Yields Relate To Mortgage Rates

Why choose a variable rate mortgage?

For a variable-rate mortgage, the interest rate is tied to the prime rate., So, as the rate goes up or down at federal announcements, or as set by lenders, your payments will fluctuate month to month depending on the movement. But variable rates are often lower, and can help save money over your mortgage term.

The pros of a Variable Rate Mortgage:

• A low prime rate means a lower variable rate, and you'll save money on interest over your mortgage term
• If rates go down, less of your payment will go to interest, and more will be put towards your principal
• May come with lower penalties if you break before the end of your term (Interest Rate Differential (IRD) or a 3-month interest penalty)
• Historically, variable rates are lower than fixed rates because of the increased risk of potential rate changes

The cons of a Variable Rate Mortgage:

• Rate and payments can fluctuate during your term, which may make it harder to budget
• If rates go up, more of your payment will go to the higher interest costs, and less will be put down on your principal
• Some variable mortgage rates aren’t portable (transferable from a current property to new one) if you sell the home within your mortgage term

Variable rate mortgages are popular with our clients who can handle a certain amount of risk and who prefer to be aggressive to maximize their savings over their mortgage term. Plus, these clients are typically able to handle a higher payment if the rate increases. Variable rate mortgages also work better for homeowners that may need to break their mortgage before the end of their term.

If the variable and fixed rates are similar, then it may make more sense to choose a fixed rate for the added protection.

Read more about how these rates are set.

Our highly-trained mortgage specialists can help you decide.

We have the industry experience and market know-how to outline your best rate options, and provide targeted advice based on your unique mortgage situation.

Whether rates are trending up or down, we'll go over the details so that you can make an informed choice.

Fixed or variable? We'll help make your decision clear and easy, AND save you more with your best-possible rate.