Variable vs Fixed Mortgage Rates

What's the difference between a variable rate and a fixed rate?

A variable-rate mortgage means your interest rate changes with movements in the prime rate — and your interest costs and mortgage payments change with it. Usually offered in a 5-year term, variable rates are often lower than 5-year fixed rates (including lender discount off of prime) because of the potential flux and resulting budget adjustments (adding risk). This rate type also comes with lower pre-payment penalties if you need to break or make a major change mid-term.

A fixed-rate mortgage is just that — your rate is set at the beginning of your term (5-year length is the most common), and your payments stay the same until it's time to renew. Often higher than a variable rate, a fixed rate provides both interest and payment stability over your term, though the penalty to break it is also higher. So while interest costs may be higher, it's considered a safer option for a consistent budget if you don't plan to move or make a major change during your term.

Read more about how these rate types are set.

Some pros and cons of a variable vs. fixed rate mortgage:

Which mortgage rate do more homeowners choose?

Typically, about 60% of our clients choose a 5-year (or shorter-term) fixed-rate mortgage, while about 30% choose a 5-year variable. The 5-year term is the most popular because banks prefer to compete on it, so it often offers the best value.

During periods of declining prime rates, however, variable rates can become the favoured choice over fixed rates. A 5-year variable is typically 0.25%-1.0% lower than a 5-year fixed rate, which can provide a lower qualifying stress-test rate to afford 'more home,' plus lower mortgage payments. Both benefits can be hard to pass up compared to a higher fixed rate.

See a really low rate? Here are a few mortgage traps to watch out for.

Who typically chooses a variable-rate mortgage?

Variable-rate mortgages are usually more popular with clients who:

• Can handle a certain amount of risk
• Can more easily absorb a higher payment if prime rises
• Prefer to be aggressive in maximizing their savings, riding out the highs and lows to save over time
• Tend to be older or more financially established
• Need to break before term's end (i.e. move for a job)
• Want to put more down on the principal than pre-payment privileges allow (paying off their mortgage faster)

Willing to take the risk? This group says: "Yes, sign me up."

Beware: an ultra-low variable rate may come with hidden costs.

Who typically chooses a fixed-rate mortgage?

Fixed-rate mortgages are usually most popular with clients who are:

• First-time home buyers
• Financially more risk-averse
• Have less room to absorb rate-related budget changes
• Prefer the certainty of a fixed monthly budget
• Don't plan to move or make larger payments on principal during their term

Want more peace of mind? This group says: "Yes, I like to sleep at night."

Fixed is the rate your parents, and your parents' parents, went with for decades. That doesn't mean it isn't still hip to choose a fixed rate today.

Budget certainty can help you focus on other things — giving you more time to settle into a payment budget while consistently paying down the principal — offering a smart strategy for a stress-free mortgage experience.

So it stands to reason that younger or more risk-cautious clients tend to choose fixed, wanting to avoid financial exposure to variable-rate changes if a budget doesn't have much wiggle room or if someone is starting a career.

Also, if you don't plan to move during your mortgage term — and the spread between variable and fixed rates is narrow — choosing a fixed rate may make more sense for the added budget certainty.

Read more: How Government Bond Yields Relate To Mortgage Rates.

Considering a variable-rate mortgage? There are two payment types available.

1. ARM (Adjustable Rate Mortgage). Some lenders, like our in-house THINK Financial, offer only a floating-payment variable-rate mortgage that adjusts with interest rate changes. This product helps to keep your variable-rate savings and mortgage amortization schedule intact and on track.
2. VRM (Variable-Rate Mortgage). Most big banks offer a variable-rate mortgage with static payments. This product offers budget stability with fixed payments. BUT if rates go up and stay up during your term, you may face a longer amortization at renewal (i.e. payment shock) or have to raise your payments mid-term anyway if you hit your trigger rate and trigger point.

The rate you feel comfortable with can come down to 4 questions:

1. Can you sleep calmly at night, knowing the risks involved with a variable rate?
2. Can your budget handle a 1%-2% increase in your mortgage rate (higher mortgage payments) if the prime rate climbs dramatically?
3. Are you focused on long-term savings vs. immediate budget concerns?
4. Do you plan to sell your property within three years, or want to pay down your mortgage faster?

Walk through the right (mortgage) door — talk to us today.

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, in your preferred language.

Whether mortgage rates are trending up or down, we often save clients over $3,000 per term on average.

Compare rates below, then connect with us for your exact numbers: