A variable rate mortgage means your interest rate changes along with movements in the prime rate — and your interest costs and mortgage payments along with it. Usually offered in a 5-year term, variable rates are often lower than 5-year fixed rates because the consumer takes on the risks from the Bank of Canada's interest rate decisions.
A fixed rate mortgage has a determined rate set from 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 will provide both interest and payment stability over your term. Here the bank takes on the risks from the interest rate fluctuations stemming from the Bank of Canada's policy decisions, and gives the borrower a consistent payment amount.
Variable Rate Mortgage
PROS
- Likely save more on interest over your mortgage term compared to a (higher) fixed rate
- If rates go down, you'll pay less interest for a budget break
- If rates go up, you may still save more over a fixed rate
- Lower penalties for breaking or switching (3 months interest vs Interest Rate Differential with fixed rate)
- Historically, variable rates tend to outperform fixed rates for savings
CONS
- If rates go up, your payment can increase, affecting your monthly budget
- If rates go up, you'll pay more interest
- Some variable rate products aren't portable (transferable from a current property to a new one) if you sell the home during your term
- You may worry more about rates rising during your term
Fixed Rate Mortgage
PROS
- Rate is set for the duration of your mortgage term
- Payments and interest won't change, making it easier to budget
- If rates go up during your term, you're protected
- Fixed-rate terms are usually portable (can go from current property to a new property)
- You may feel more peace of mind if rates rise during your term
CONS
- Higher penalties for breaking or switching (Interest Rate Differential or 3 months interest, whichever is greater)
- Historically, fixed rates are higher than variable rates, which may cost you more
- If rates go down during your term, you'll need to refinance or wait for your renewal to take advantage