Variable and Fixed Rate Mortgages
Note: With our volume pricing, Mortgages Canada offers the best variable and fixed rates in the country.
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|Variable Interest Rates||Fixed Interest Rates|
|Description||Interest rates, together with mortgage payments, change over time (they change with the prime rate).||Interest rates are constant (unchanging), and so mortgage payments remain constant as well.|
|Advantages||Historically less expensive.||Stability, consistency in payment amounts.|
|Disadvantages||Financial uncertainty (significant changes in interest rates result in significant changes in mortgage payments).||If interest rates drop, you pay more than others who are set with the lower rate. Only way to change your rate is to refinance, which can be costly.|
Variable or Fixed Rates – What’s the right option for you?
Fixed Mortgage in Canada: What is a fixed interest rate?
Fixed mortgage interest rates are interest rates that stay fixed for the entire term length of the mortgage. This means equal payments every month and any fluctuations in the interest rate will not affect you. Fixed-interest rates are usually recommended for first-time home buyers so that they can manage their household budgets easier without the worry of possible payment increases.
Variable Mortgage in Canada: What is a variable rate?
Variable mortgage rates change over time. The variable mortgage interest rate adjusts with the prime rate. The prime interest rate may go up or down and this may affect your monthly mortgage payments. When the prime rate goes up, more of your mortgage payment will go to pay down interest; and when the prime rate goes down, more of your mortgage payment will go to pay down principal. In the event that the variable interest rate rises past what your mortgage payment would cover in just interest payments, your payment can be adjusted upward or your amortization could be extended. Interest rate is affected by the Canadian economy and monetary policies, such as the prime rate, is set by the Bank of Canada.
Variable vs Fixed Rate Mortgages
Variable and Fixed Mortgage Interest Rate Comparison:
- A variable mortgage has a lower interest rate than a fixed rate mortgage, but the rate may go up.
- A fixed rate mortgage gives you 100% certainty that payments will not change for the entire mortgage term length.
Studies by Dr. Milevsky of York University have shown that between 1950 to 2007, one in seven Canadians who chose variable-rate mortgages saved an average $20,630 on interest payments per every $100,000 over a 15-year period due to lower interest rates offered on variable mortgages.
Whether the variable-rate mortgage or fixed-rate mortgage turns out better depends on what happens to interest rates in the future, which no one can predict with total accuracy. Ask yourself these questions: “Is this risk worth taking? Can I afford it?”
Payments on a variable mortgage vary every month by around $20 up to $250. If rates go down significantly, payments may decrease by an average of $100. If rates increase significantly, payments may go up by $100. Though you can save more, changing payments can cause a headache to your budgeting.
A fixed mortgage offers one stable payment amount which stays constant.