Variable vs. fixed rate mortgages

With a variable rate, your interest rate can increase and decrease over the duration of your mortgage term. With a fixed rate, your interest rate never changes. But even experts remain divided on which type is best given today’s low interest rate environment. Evaluate your financial profile and your risk appetite before deciding between variable and fixed rates.

Variable rate mortgages

A variable rate mortgage increases and decreases over the duration of your mortgage term as the prime rate of the mortgage lender goes up and down. Here’s an example: if a bank advertises a rate of prime -0.1% and the prime rate is 3%, your interest rate would be 2.9% at the start of your mortgage term. Variable mortgages are often referred to as ‘floating’ -- they rise and fall throughout the length of the term based on current economic conditions.

Fixed rate mortgages

With a fixed rate mortgage, your interest rate doesn’t change over the length of your mortgage term. Fixed rate mortgages offer a certain level of comfort and security: you’ll know exactly what your payments will be each month for the entire duration of your mortgage term.

What’s a prime rate?

The benchmark interest rate banks and other types of lenders use when offering variable rate loans. Prime is directly influenced by the Bank of Canada’s overnight lending rate and can change on a monthly basis. Changes in both the BoC’s overnight lending rate and the prime lending rate are determined by a host of economic factors including GDP growth, inflation, credit market conditions, and the unemployment rate.

So, should borrowers choose a variable or fixed rate?

Over the last 25 years, Canadians with variable rate mortgages have typically paid less interest than those who took a fixed rate. While variable rates may save you money over time, you need to be financially and psychologically prepared for your mortgage payments to rise during your mortgage term. If the prospect of paying an extra $200 per month on your mortgage keeps you up at night, variable rates may not be the right choice for you.

If you’re still not sure which type of rate to pick, you can also quickly compare variable and fixed rate mortgage offers with LowestRates.ca.