Menu Toggle
Search
  1. Home
  2. Mortgages
  3. Fixed vs Variable Mortgage Rate: Which Is Better For You?
Published April 19, 2023
Reading Time
5 minutes

Fixed vs Variable Mortgage Rate: Which Is Better For You?

With a fixed-rate mortgage, your interest rate and payments won’t change during your mortgage term. But they might if you opt for a variable-rate mortgage.

Comparing fixed and variable mortgage rates typically comes down to two factors: predictability and cost.

With a fixed-rate mortgage, you’ll know exactly what your interest rate and mortgage payments will be for the duration of your mortgage term. With a variable-rate mortgage, your rate and payments can fluctuate. That uncertainty creates risk for the borrower, which is why variable rates have almost always been lower than fixed rates. 

“Fixed or variable?” is a question home buyers have to answer, so let’s take a look at both mortgage rate types and see which one is right for you.

Get your lowest mortgage rate with nesto

Stay on the bright side of mortgages with Canada’s leading digital mortgage lender. Secure your commission-free, low rate guarantee mortgage with nesto today.

Ad Icon

How a fixed-rate mortgage works

Fixed-rate mortgages are the most popular mortgage type in Canada. They aren’t always the cheapest option, but fixed rates provide a level of stability that many borrowers feel is worth a little extra money. 

With a fixed-rate mortgage, you pay the same interest rate for the entirety of your mortgage term, whether it’s six months, five years or longer. (The longer the term, the lower the rate tends to be.) Even if fixed mortgage rates increase or decrease, your rate and your monthly payment will remain the same. 

Types of fixed-rate mortgages

In addition to different term lengths, fixed-rate mortgages also vary based on loan type. 

The most common type of fixed-rate mortgage is a closed mortgage. A closed mortgage cannot be adjusted mid-term and will provide modest, if any, opportunities to pay off your mortgage early. Breaking a closed mortgage before the end of the term can trigger huge prepayment penalties.

It’s uncommon, but you can also find fixed-rate products that are open mortgages. With an open mortgage, you can repay your entire mortgage ahead of schedule and not face any penalties. Because of the increased flexibility, open mortgage rates may be significantly higher than closed mortgage rates.

Benefits and risks of fixed-rate mortgages

Benefits:

  • Easier budgeting. Your interest rate and mortgage payments will remain the same over the course of your term, which can make financial planning a little easier.
  • Stability. You’ll know the proportion of each monthly payment that will go toward interest and principal, and you can predict exactly how long it will take you to pay off the mortgage.

Risks:

  • Higher interest rates. Fixed-rate mortgages are usually higher than variable-rate mortgages.
  • You’re locked in. With a variable-rate mortgage, you can benefit from decreases in interest rates. But your rate won’t move — or improve — if it’s fixed.
  • High penalties. If you need to break your closed fixed-rate mortgage contract, either so you can sell your home or refinance your mortgage, you could face crushing prepayment penalties.

How a variable-rate mortgage works

With a variable-rate mortgage, your interest rate rises and falls, following movements in your bank’s prime rate. That means the amount of interest you pay can differ from year to year, or even month to month if variable rates are rapidly increasing.

That’s what happened to Canadian homebuyers between March 2022 and January 2023, a period that saw variable mortgage rates increase by a whopping 4.25%. Historically, though, variable rates have rarely ramped up at such a blistering pace. 

Variables come in different term lengths, but most are five years. With a term that long, you could experience a fair amount of movement in your interest rate. There’s a risk your rate could go higher, but there’s also the possibility of it dropping multiple times, which can make variables seem quite enticing.

Variable-rate mortgages also come with smaller penalties than fixed-rate mortgages — generally three months’ interest — if you have to break your mortgage contract mid-term.

Types of variable-rate mortgages

As with fixed-rate mortgages, variable-rate mortgages come in both open and closed varieties. But there are other mortgage types to be aware of.

With a fixed payment variable-rate mortgage, which make up the majority of Canada’s variable-rate mortgages, your monthly mortgage payment will stay the same even if mortgage rates change. But the structure of your payment will be altered: If rates decrease, more of your payment will be put toward the principal; if rates rise, more goes toward interest.

If rates rise significantly, however, and your monthly payment no longer covers your loan’s interest charges, you’ll reach what’s known as the trigger rate and have to work with your lender to find a solution.

Variable rates that don’t have fixed payments are known as adjustable-rate mortgages. With an adjustable-rate mortgage, your actual monthly payments will rise and fall in concert with any interest rate changes. Adjustable-rate mortgages can be the hardest to plan around since they come with the least amount of predictability.

Benefits and risks of variable mortgages

Benefits:

  • Potentially lower costs over time. If interest rates remain the same or fall during your term, you’ll pay less interest with a variable-rate mortgage than you would with a fixed-rate mortgage.
  • Minimal break penalties. Most lenders charge three months’ interest if you need to break your variable-rate mortgage contract.
  • Ability to switch to a fixed-rate mortgage. Many lenders will allow homeowners with a variable-rate mortgage to change to a fixed-rate mortgage at any time if their payments are becoming difficult to manage.

Risks:

  • Lack of stability. If interest rates rise, you could end up paying more than you would have with a fixed-rate mortgage.
  • Converting could cost you more. If you convert to a fixed-rate mortgage, it will be at the current interest rates — which might be higher than they were when you took out your mortgage.

Frequently asked questions about fixed vs variable mortgage rates

Which is better, a fixed- or variable-rate mortgage?

If you value certainty, and plan on staying in your home for a while, the extra cost and risk of prepayment penalties associated with a fixed-rate mortgage could be worth it. If you don’t mind the uncertainty, a variable-rate mortgage could save you money if rates drop in the middle of your mortgage term.

What are the downsides of a variable-rate mortgage?

Because variable mortgage rates are tied to the state of the Canadian economy, they are very hard to predict. You could take out a variable-rate mortgage right before variable rates rise and stay elevated, leading to months — or years — of higher mortgage payments you may not be able to afford.

DIVE EVEN DEEPER

Mortgage Affordability Calculator: How Much Mortgage Can I Afford?

Mortgage Affordability Calculator: How Much Mortgage Can I Afford?

How much mortgage can you afford? Use our mortgage affordability calculator to see how your interest rate, down payment and debt ratios affect your housing budget.

Find the Best Mortgage Rates in Canada

Find the Best Mortgage Rates in Canada

Compare customized mortgage rates from Canada’s best lenders and brokers for free. Find and easily apply for the lowest mortgage rate for your needs.

Closing Costs When Buying a Home

Closing Costs When Buying a Home

Closing costs include legal and administrative fees and can run from 1.5%-4% of the purchase price of the home.

Buying a House in 2024: 5 Things to Know

Buying a House in 2024: 5 Things to Know

Buying a house in Canada in 2024 could be tricky. Mortgage rates might soften, but what will that mean for competition — and home prices?

Back To Top