Fixed vs Variable Interest Rates

Fixed Rate Mortgage

A fixed rate mortgage is a mortgage where the rate of interest is fixed for a specific period of time. This is known as the mortgage term, it usually ranges from between 6 months and 25 years. The most common terms are 3 to 5 years in length.

Variable Rate Mortgage

A variable rate mortgage is a mortgage where the interest rate fluctuates with changes to the prime lending rate as set by the bank of Canada. If the interest rate rises, your payments will also rise but if rates decrease your payments also decrease.  

Choosing a Mortgage Product

There is some risk associated with a variable rate mortgage; you need to assess your ability to service the mortgage in the event that rates do rise. If you like to keep a strict monthly budget and know what all your payments will be and cannot handle an increased payment or if you can't sleep at night knowing that your rate may change by .25%, then a variable rate mortgage may not be the best option for you.

Many studies suggest that from a historical perspective a variable rate is the best option. Just keep in mind that no one can predict where rates are going to be with any certainty and none of the economists who make the predictions will be making your mortgage payments.

Options to Ask About

• Does the lender allow the mortgage to be converted to a fixed rate mortgage at any time?

• If so what rates will be offered upon conversion?

• Will you get their best-discounted rate or their posted rates?

• What length of term will the lender allow you to switch into?