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Published August 9, 2021

How to Choose Between Fixed and Variable-Rate Mortgages

Variable-rate mortgages generally offer lower rates and but could result in payments that increase over time. Fixed-rate mortgages have higher rates, but guarantee your mortgage payment stays the same

Whenever you get a mortgage, one of your first choices is deciding between fixed or variable rates. It’s easily one of the most significant decisions you’ll make since it’ll affect your monthly payments and the total cost of your mortgage over time.

While it may be tempting to go with the lowest rate you’re offered, it’s not that simple. Both types of mortgages have their pros and cons, which is why you need to understand how fixed-rate and variable-rate mortgages work before you make your decision.

What is a fixed-rate mortgage?

With fixed-rate mortgages, your interest rate stays the same for the length of your term. It doesn’t matter if interest rates go up or down. The interest rate on your mortgage won’t change, and you’ll pay the same amount every month. Fixed-rate mortgages typically have a higher interest rate compared to variable-rate mortgages because they guarantee a consistent rate.

Although most people go with five-year terms, you can get a fixed-rate mortgage with a term anywhere from six months to 10 years from some lenders. The shorter the term, the better the rate you’ll usually get. Choosing a longer term means you’re essentially buying certainty, but you’ll have to sacrifice lower interest rates to do so.

» MORE: Browse the best 5-year fixed mortgage rates in Canada

What is a variable-rate mortgage?

Variable-rate mortgages are appealing because the interest rates are typically lower than those on fixed-rate mortgages. If interest rates fall during your term, your mortgage interest rate will too — and the amount of interest you pay will decrease.

A variable-rate mortgage typically offers an interest rate tied to the lender’s prime rate, which is usually tied to the Bank of Canada’s prime rate. Let’s say you’ve signed a mortgage for the prime rate -0.50%. Your lender currently has a posted prime rate of 2.50%, so you’ll pay 2% interest. If the prime rate were to fall to 2.25%, your interest rate would be 1.75%. However, if the prime rate went up to 2.75%, your interest rate would increase to 2.25%.

But whether your interest rate goes up or down, you’ll still pay the same amount each time you make a mortgage payment. The difference is in how much is applied to the principal and the interest. When the interest rate goes up, more of each payment goes toward interest; when rates go down, more of each payment goes toward your principal, which will help you pay off your mortgage faster.

Many lenders also allow you to convert a variable-rate mortgage to a fixed-rate mortgage at any time.

Pros and cons of a fixed-rate mortgage

Even though fixed-rate mortgages are more popular than variable-rate mortgages, it’s important to consider the pros and cons before making a decision.


  • Stability. Your interest rate will remain the same over the course of your term.
  • Predictability. 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.


  • Potentially higher costs over time. If interest rates drop, it’s possible that a fixed-rate mortgage could wind up being more expensive than a variable-rate mortgage would have been.
  • Break penalties. Some lenders charge high fees if you need to break your closed fixed-rate mortgage contract, such as if you decide to sell the home.

Pros and cons of a variable-rate mortgage

Many people are naturally attracted to variable-rate mortgages because the interest rates are lower than for fixed-rate mortgages. That said, rates can change at any time, so you need to look at the pros and cons before choosing your mortgage.


  • 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 of 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.


  • 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.
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How to choose between a fixed vs. variable mortgage

The debate between fixed vs. variable mortgages may seem easy, but many different factors can affect your decision. Traditionally, fixed-rate mortgages have been more popular, but variable-rate mortgages have saved homeowners more money most of the time. That said, with such low interest rates available in recent years, many people are flocking towards fixed rates.

Here are some things to think about before making your decision:

  • Interest rates. If you think interest rates will go up, then going fixed is a good way to lock in your rates. If you believe rates will drop, choosing a variable-rate mortgage could save you big.
  • Your risk tolerance. If you’re naturally conservative and don’t like taking risks, then a fixed-rate mortgage is likely better for you since your interest rate will be the same for the term, and you’ll know exactly how long it will take to pay off your mortgage.
  • Spread. The spread is the difference between the lowest rates for fixed and variable-rate mortgages. When the spread is high, many people opt for a variable rate. If the spread is low, a fixed rate might be worth locking in.
  • You may sell your home within the term. If you ever need to break your mortgage, you’ll need to pay a penalty. Fixed-rate mortgages typically calculate the fee using the amount of interest you’d pay over the remainder of the term, which can be astronomical. With variable-rate mortgages, you usually only have to pay three months’ worth of interest to get out of your contract.

While many people look strictly at the numbers when debating fixed vs. variable mortgages, it’s not that simple. Interest rates can change at any time, so it’s really a coin toss when it comes to which one will save you more money. You might be better off looking at your risk tolerance and thinking about how you’ll feel about changing interest rates.

If you want the peace of mind that comes with knowing that your mortgage rates will stay the same for your full term, go for a fixed-rate mortgage. If you’re willing to speculate that rates will stay the same or decrease, a variable-rate mortgage may be more appealing.

About the Author

Barry Choi

Barry Choi is a personal finance and travel expert. His website is one of Canada's most trusted sites when it comes to all things related to money and travel.


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