Fixed vs. Variable Mortgage Rates: Which One is Right for You?

Choosing between a fixed and variable mortgage rate is one of the biggest decisions homeowners face. Both options have their advantages, and the right choice depends on your financial situation, risk tolerance, and comfort level.

Here’s a breakdown of how each works—and what you should consider before making a decision.

Fixed-Rate Mortgages: Stability and Predictability

A fixed-rate mortgage means your mortgage payment stays the same for the entire term, regardless of what happens to interest rates. This option provides:

• Predictability – Your payment amount will not change, making it easier to budget.
• Peace of Mind – You do not have to worry about rate increases affecting your monthly expenses.
• Protection from Market Fluctuations – Even if interest rates rise, your mortgage rate stays locked in.

What to Consider

The biggest drawback of a fixed-rate mortgage is the penalty if you break your mortgage early. Fixed-rate penalties are calculated using the Interest Rate Differential (IRD), which can be expensive—especially with major banks that use posted and discounted rates in their calculations.

If there is a chance you might break your mortgage before the term is up, a shorter fixed-term, such as two or three years instead of five, may be a safer option.

Variable-Rate Mortgages: Flexibility and Potential Savings

A variable-rate mortgage moves with the prime rate, meaning your interest rate (and possibly your payment) could go up or down over time. This option is often more cost-effective in the long run when rates are stable or decreasing.

• Lower Prepayment Penalty – If you break your mortgage, the penalty is typically just three months’ interest, which is much lower than the IRD penalty on a fixed-rate mortgage.
• Potential Cost Savings – Historically, variable rates have averaged lower than fixed rates over time.
• More Flexibility – If rates are expected to drop, a variable-rate mortgage allows you to benefit.

Understanding Variable Payments

Not all variable-rate mortgages work the same way. Some adjust your payment when rates change, while others keep the payment the same and simply adjust how much goes toward interest versus principal.

Why Does This Matter?

• If your payment does not change, but interest rates rise, more of your payment will go toward interest and less toward principal.
• If rates rise too much, you could hit a trigger point where lenders require a payment increase or a lump-sum payment.

If you have a variable-rate mortgage, it is important to understand how your payments work and plan accordingly, especially if rates are increasing.

Which One is Right for You?

At the end of the day, choosing between fixed and variable comes down to what you are comfortable with.

• If you would rather not worry about changing interest rates, a fixed-rate mortgage provides stability and peace of mind.
• If you are comfortable with some fluctuations and want lower penalties, a variable-rate mortgage may be worth considering.

If you are unsure which option is best for you, let’s run the numbers and see what makes the most sense based on your situation.