Fixed vs. variable rate mortgages: pros and cons of each

Buying a home is a huge milestone. But before you can pack up and move in, you’ll need to decide on a mortgage. That includes choosing between a fixed vs. variable rate mortgage — an important decision you’ll make during your home buying journey. Understanding the difference is especially important for first-time buyers.

The type of mortgage you choose will impact how much interest you pay, both in the short term and the long term, and how your payments are structured. Plus, there’s a variety of factors to consider, from your unique financial situation to the current economic climate.

Luckily, you don’t have to decide on your own. We’ll break down the major differences between fixed and variable-rate mortgages and help you discover which choice is right for you.

What are fixed rate mortgages?

Fixed rate mortgages are just that — fixed. Your mortgage interest rate will stay the same the entire duration of your mortgage term.

That means that even if prime interest rates rise or fall, your mortgage rate will remain locked in. Your payments will also remain the same and you’re on a set amortization schedule. If you are looking for this level of stability and predictability on your mortgage, then a fixed rate mortgage might be the right option for you.

What are variable rate mortgages?

Variable mortgages, as the name suggests, will not have fixed rates through the term of your mortgage. It fluctuates based on the bank’s prime rate which is influenced by changes to Bank of Canada overnight rates.

In this case, your regular scheduled payments will remain the same, but the amount that you pay toward interest can fluctuate. So if the variable rates rise, you’ll find that more of your payment is going toward interest, which may increase your amortization period.

One thing to know about the prime rate: with a variable rate mortgage, your rate will be set at a certain amount above or below the prime rate (such as prime - 0.55%). Though the prime rate may change over time, the variance to the prime rate will stay constant throughout your term.

What’s the difference between fixed vs. variable rate mortgages?

The main difference between fixed-rate and variable-rate mortgages is how your interest rate works. With fixed-rate mortgages, you have one set-in-stone interest rate for the entire term of your mortgage. With variable-rate mortgages, your rate will go up or down based on the prime market rate, set by your bank or lender.

For both types of mortgages, your regular payments remain the same. With a fixed mortgage, you have locked in your interest cost over the term of your mortgage. This means that, as long as you make all your payments during your term, you know what your outstanding loan amount will be at renewal.

With a variable rate mortgage, your payments don’t change but your interest rate might. When rates rise, you end up paying more interest and less principal. As a result, your amortization period may be impacted.

The type of mortgage also impacts your payments. With a fixed-rate mortgage, payments you make each month will stay the same for the full duration of the mortgage term. With a variable-rate mortgage, while the amount you pay stays the same through the term, the amount that goes toward interest can fluctuate. If rates rise, you’ll pay more toward your interest and less toward principal in each payment.

Fixed vs. variable rate mortgage: how to choose?

So now that you understand the basics of both fixed-rate and variable-rate mortgages, how do you decide which one is the right fit for you? Before you decide, it’s important to understand the features of each type and what’s most important to you as a home buyer.

To help you think through your options a bit more, let’s walk through the benefits and potential drawbacks of both fixed and variable rate mortgages.