Breakdown on Fixed and Variable Rates

A common question mortgage brokers receive is what is the difference between fixed and variable rates? Deciding between the two options when getting your mortgage can be a hard decision.

A fixed rate mortgage will guarantee you a locked in rate for whatever term you choose. The rate will remain unchanged through out that term which allows you to always know what to expect when it comes to your required payment.

A variable rate mortgage is based on prime rate. You can receive a discount off prime rate or you may have a premium added to the rate. You will receive a variable rate for a set term however if prime rate changes, so does your interest rate. The Bank of Canada determines where prime rate is set. They have 8 scheduled meetings a year to determine if any changes should be made to prime rate. This means your mortgage payment can fluctuate throughout the term. With a variable rate mortgage you can lock in to a fixed rate term at anytime, however you will be locking in at present day rates offered. Variable rate may not be the best choice for you if you feel you will always be worrying about when you should lock in.

There are different situations when either option may work better for you. The penalties do differ between fixed and variable. With a fixed rate mortgage your penalty could be either 3 months interest or interest rate differential, where with a variable rate mortgage it will only be 3 months interest. It is always a good idea to refer to a mortgage broker to help gain insight on what may work best for you.