Fixed vs. Variable Mortgages: Full Comparison
What You Should Know
- Historically, fixed-rate mortgages have been more expensive than variable-rate mortgages over their lifetime; however, they have recently outperformed variable-rate mortgages in the short term.
- Fixed-rate mortgages have pre-determined mortgage payments but have higher prepayment penalties. Variable-rate mortgages feature lower prepayment penalties, but there is a risk of your interest rate increasing during the term.
- Borrowers with a variable-rate mortgage will benefit if interest rates go down.
- Some lenders let you convert a variable-rate mortgage to a fixed rate or even combine a fixed rate and a variable rate into a hybrid mortgage.
Lenders will typically offer you the option of choosing between a fixed rate and a variable rate mortgage. The option you pick will determine the composition of your periodic payments and will also have an effect on how much interest you would end up paying. To help you choose which option works for you better, we have compared variable vs fixed mortgages and listed their pros and cons on this page.
What Are Fixed Rate Mortgages?
Fixed-rate mortgages have an interest rate that does not change for the length of your mortgage term. Fixing your mortgage rate allows you not to worry about mortgage rates until your mortgage is up for renewal. Your mortgage rate, as well as the payments, will remain constant throughout the term.
Fixed rates are generally higher than variable rates; thus, you may end up paying more interest over the lifetime of the mortgage. However, that is not always the case, as has been observed in recent years when variable rates have consistently been higher than fixed rates. Meanwhile, fixed-rate mortgages typically have higher prepayment penalties compared to variable-rate mortgages.
What Are Variable Rate Mortgages?
The interest rate of a variable-rate mortgage fluctuates over the course of the mortgage based on a benchmark, such as the prime rate. Thus, the portion of your mortgage payments that goes towards paying the principal and the interest varies. If the interest rates go up, less of your periodic payments will go towards paying the principal, and you can also be at risk of your amortization period becoming longer.
If you’re comfortable with uncertainty about future mortgage rates, a variable-rate mortgage can save you money if interest rates stay the same in a normal yield curve environment or fall.
Fixed vs Variable Mortgage
| Fixed Rate Mortgages | Variable Rate Mortgages |
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| Cons | Cons |
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Let us assume an example where you are offered a fixed-rate mortgage at 3% or a variable-rate mortgage at 2% for a 5-year term. If your variable rate stays at 2% and then increases to 3% in three years and 4% in four years, you may still save money with a variable rate. You would have two years to benefit from a rate that is 1% lower than the fixed rate offered. These extra interest savings may offset the one year where your variable rate is 1% higher than the fixed rate. However, if the interest rates suddenly increase a lot in a year, like in 2022, you may pay more interest with a variable-rate mortgage over the 5-year term.
A key benefit of variable mortgage vs fixed mortgage is the lower prepayment penalties. With a variable rate, mortgage prepayment penalties will generally only be three months of interest. For fixed mortgages, the penalties can be significantly higher using an interest rate differential.
Fixed vs Variable Mortgage Statistics
Market Share of Variable Rate Mortgages (New Loans)
Source: Statistics Canada
Market Share of Variable Rate Mortgages (Outstanding)
Source: Statistics Canada
Fixed (5-Year) vs Variable Mortgage Rates
Source: Statistics Canada
Types of Fixed and Variable Rate Mortgages
Types of Fixed Rate Mortgages
Fixed-rate mortgages can be open or closed mortgages. The distinction is based mainly on prepayment privileges. Prepayments are payments that you make outside of your payment schedule.
- Open Mortgages: If you have an open mortgage, you can make any amount of prepayment or pay off your mortgage at any time without being charged a prepayment penalty.
- Closed Mortgages: If you have a closed mortgage, you cannot pay off, refinance, or negotiate your mortgage before the end of the term without paying a penalty. Closed mortgages tend to have a lower interest rate than open mortgages.
Types of Variable Rate Mortgages
Similar to fixed-rate mortgages, variable-rate mortgages can also be open or closed. Open variable mortgages allow you to make prepayments without penalty, while you will be charged prepayment penalties if you have a closed variable mortgage. However, the prepayment penalties are typically lower than fixed-rate mortgages.
Meanwhile, variable-rate mortgages can be divided into two main categories based on the type of payment:
Variable Rate Fixed Payment Mortgages: Most banks offer fixed mortgage payments, even if your variable rate changes. If the interest rate decreases, the portion of your regular mortgage payment going toward paying the interest will decrease, and the portion going toward the principal will increase. Meanwhile, the portion going towards the interest increases if the interest rate increases. If variable rates rise significantly, and your mortgage payment doesn't cover your mortgage interest, then you have reached your trigger rate. Your fixed mortgage payment may need to be increased.
If variable rates decrease, you'll pay more toward your principal, which means you are paying off your mortgage faster. If variable rates increase, you’ll be paying your mortgage slower, which will cause your mortgage amortization to be longer temporarily. For CMHC-insured mortgages with a maximum allowed amortization of 25 years, your variable rate mortgage still needs to be within this limit.
Variable Rate Variable Payment Mortgages: Having a variable mortgage payment with your variable rate mortgage means that your payments will fluctuate along with your mortgage rate. In Canada, this is also known as an adjustable-rate mortgage (ARM).
Since adjustable-rate mortgages have a mortgage payment that changes with your variable rate, your mortgage’s amortization won’t change even if your rate changes. This allows for your mortgage to be paid off on-time. However, changing mortgage payment requirements can make it difficult to budget for, as rapidly rising variable rates may cause your mortgage payments to increase significantly.
Capped Variable Rate Mortgage
A capped variable rate is the maximum interest rate for your variable rate during your term. The main advantage of a capped variable mortgage is that it protects you from sharp increases in interest rates. The rates of capped variable-rate mortgages are generally higher than regular variable rates, but you’re protected from large increases in rates through your mortgage’s maximum interest rate cap.
For example, a mortgage lender might offer a 5-year variable mortgage rate of 4% or a capped variable rate of 4.5% with a cap of 6%. This 6% maximum is effective for the length of your term (typically 5 years). If variable rates increase to 7%, the capped variable-rate mortgage in this example would have an interest rate of just 6%.
What is a Hybrid Mortgage?
For homeowners who can’t decide between a fixed rate and a variable rate, a hybrid mortgage, also known as a combination mortgage, allows them to have both. It combines a fixed rate portion with a variable rate portion to make up the mortgage.
The portions don't necessarily need to be 50% fixed and 50% variable, either. Some hybrid mortgage lenders, such as Desjardins, allow you to have several portions with different terms, mortgage rate types, amortization, and payment frequency. For example, you can choose to have 30% of your mortgage being a variable rate with a 5-year term and 70% of your mortgage having a fixed rate with a 3-year term.
Variable Rate Mortgage Strategy
Treating a variable-rate mortgage like a fixed-rate mortgage can reduce the risk and help you pay off your mortgage faster. You can use the interest savings from a lower variable rate to make mortgage prepayments, or you can save them to use in the event that variable rates increase. You can also protect yourself from future rate increases by storing up savings from the beginning of your term.
Variable Rate Mortgage Strategy Example
For example, let's assume you want to get a $500,000 mortgage with a 25-year amortization with a 5-year initial term and a monthly mortgage payment frequency.
You decide to get a 5-year variable rate mortgage with a rate of 1.50%. This means that your monthly payments will be $2,000. The best fixed mortgage rate offered at the time was 2.50%. If you had gotten a fixed-rate mortgage instead, your monthly payments would have been $2,240.
With a variable mortgage rate, your monthly payments are currently $240 lower every month. You can use this for mortgage prepayments, which can be used to increase your monthly payments to $2,240 so that you'll be paying off your mortgage faster. You can also use the savings for other purposes, such as paying high-interest debt.
FAQs
Is it better to get a fixed or variable mortgage?
The type of mortgage you should get depends on your unique situation and your risk appetite.
If you are not scared of the financial uncertainty that comes with a variable-rate mortgage, then you can potentially save some money by opting for a variable rate. Historically, fixed-rate mortgages have proven to be more expensive than variable-rate mortgages; however, that doesn’t guarantee that you will save money with a variable rate.
Meanwhile, if you want the peace of mind of knowing that your interest rate and payment will not change, regardless of whether rates increase or decrease, then you might be better off getting a fixed-rate mortgage.
Can I switch from variable to fixed mortgage?
Some lenders allow you to convert your variable-rate mortgage to a fixed-rate one during your term. This allows you to lock in a fixed rate if you feel that interest rates will rise soon, but it’s too early for you to renew and switch to a fixed rate.
It’s important to note that you won't be locking in your variable rate. Instead, you will receive the current fixed mortgage rate. Your converted mortgage will also be for the remaining term length of your variable mortgage, not re-extended to match your original term. Your lender might also have conditions on when you can convert your mortgage.
Meanwhile, it’s rare for mortgage lenders to allow you to switch from a fixed-rate mortgage to a variable-rate mortgage partway through your term without penalties. Thus, once you’ve converted from a variable rate to a fixed rate, you won’t be able to switch back until the end of your term.
Should I switch to a fixed-rate mortgage if rates decrease?
If you have a variable-rate mortgage and interest rates are currently low, you might consider switching to a fixed-rate mortgage. Once you’ve locked in a fixed mortgage rate, your payments will stay the same for the entire term, even if interest rates rise. This can save you a lot of money if rates go up during your term. However, if rates continue to decrease, you might be better off keeping your variable mortgage rate.
You must also keep in mind that switching to a fixed mortgage might incur prepayment penalties. Depending on your mortgage lender, you may be able to renew your mortgage early, which could be as far out as six months at some banks. Early mortgage renewals allow you to switch from a variable rate to a fixed rate at no extra cost within your early mortgage renewal period.
Ultimately, it’s up to you to weigh the pros and cons of each type of mortgage rate to decide which is best for your situation.