There are several differences between fixed vs. variable rate mortgages, but the most important detail is that fixed rates provide a consistent interest rate throughout the term while variable rates have a fluctuating rate. If you have trouble separating the 2 types, this is the main thing to remember.
Most people simply want to know that they’re getting the best mortgage rate possible so they’re not paying more than is necessary. But there are pros and cons to both types of mortgage options, details that can impact the reality of which is best for you.
Do you understand these differences? To help prepare you for the financial journey ahead, we’ve created this guide to help you differentiate between them – because being fully informed is essential to your financial well being.
What are fixed rates?
A fixed interest rate is one that’s charged as a set rate that remains constant and consistent throughout the life of the term.
While the monthly payment itself stays the same, the amount applied to interest vs. the principal changes regularly – especially with mortgages. Therefore, payments towards the end of the loan period are mostly applied to the principal charges. But early on, you’re mostly paying interest.
Fixed rate mortgage example
For example, Tangerine bank offers various rates for fixed rate mortgages, each depending on the term length of the loan. An online bank owned by Scotiabank, Tangerine also offers some of the best fixed mortgage rates in Canada.
Here’s what their current rates look like, depending on the length of the term:
- 1 year: 6.54%
- 2 year: 5.64%
- 3 year: 4.69%
- 4 year: 4.74%
- 5 year: 4.79%
- 7 year: 5.6%
- 10 year: 6%
Want to learn more? Check out our full review here:
- 1 year: 6.54%
- 2 year: 5.64%
- 3 year: 4.69%
- 4 year: 4.74%
- 5 year: 4.79%
- 7 year: 5.6%
- 10 year: 6%
Tangerine mortgage rates have historically been very competitive, especially before and during the pandemic. While they tend to hover close to big bank rates nowadays, you can still find a good deal with this Scotiabank-owned online bank. On top of the rates, you also get a dedicated mortgage account manager, plus can port your mortgage with no penalty if you need it.
- Tangerine fixed mortgage rates are competitive
- Lock in your Tangerine mortgage rate for 120 days
- Prepayment options available
- Annual payment increases available
- No specialized fixed rate mortgages available
- Tangerine mortgages are with an online-only bank
- Canadian resident or applied resident status
- Minimum credit score of 620 with no prior bankruptcies
- At least 3 months of full-time employment
- Get a dedicated account manager once approved
- Can move to a new home penalty free
Click here to compare the best mortgage rates in Canada.
What are variable rates?
A variable rate is one that isn’t set in stone. Instead, the interest payments fluctuate along with market trends, allowing homeowners to occasionally enjoy much lower rates than their fixed mortgage counterparts.
Variable mortgage rates are set at the prime lending rate plus or minus a discount or premium. Therefore, your mortgage rate rises along with any prime rate increases. The same is true for decreases.
Most of the time, variable rates start out lower than fixed rates – but there’s the added danger that the prime could shoot up and you end up paying more down the road.
Variable rate mortgage example
If we again look at variable mortgage rates through Tangerine, you’ll find they currently only have one option:
- 5 year: 4.79%
Once this term expires, mortgage holders are free to enter into a new mortgage agreement or even pay back the balance of the principal.
- 5 year: 4.79%
You may be thinking about shopping around for a mortgage. Tangerine offers a small array of mortgages for Canadians, including the Tangerine variable rate mortgage.
- Low interest rates
- Flexible prepayment options
- Portable mortgage
- Only 1 type of variable mortgage available
- Variable rates are…variable
- No promotions or other incentives
- Tangerine is an online-only bank
- Canadian resident or applied resident status
- Minimum credit score of 620 with no prior bankruptcies
- At least 3 months of full-time employment
- Get a dedicated account manager once approved
- Can move to a new home penalty free
Fixed rate vs. variable rate
When looking at fixed rate vs. variable rate mortgages, both have several benefits and drawbacks, of course, making it impossible to say which is “better.” Only you, the mortgage holder, can decide which option better suits your finances and preferences.
Let’s take a look at how the various pros and cons stack up.
| Mortgage rate type | Fixed rate | Variable rate |
|---|---|---|
| Pros | * You’re protected from sudden and/or extreme increases in monthly payments. * The stability of payments offers peace of mind. * Overall, it’s easy to understand. | * Historically, this is the less expensive option. * You’re able to take advantage of low rates. * Can potentially still switch to a fixed rate mortgage if you’re uncomfortable with how rates are consistently going up. * It incurs less penalties for breaking the mortgage agreement than a fixed rate does. |
| Cons | * You may miss out on low interest rates that would significantly lower your monthly payments. * You may pay more in the long-term than with a variable rate. * Can stretch your budget if you lock in when rates are particularly high. * If rates go down significantly, the only way you can take advantage is to refinance. | * Risk your rates going up at any time. * It’s sometimes more difficult to qualify for this vs. a fixed rate option. * The monthly payments vary, which can make it more difficult to budget. * Paying off your mortgage may take longer since what you pay on the principle varies. |
There’s quite a bit of information here, so let’s go over each benefit and drawback in a bit more detail.
Pros of fixed rates
There are several reasons why a fixed rate mortgage might be right for you. Let’s discuss the benefits to entering into such an agreement.
1. Monthly payments are stable
The most obvious benefit to having a fixed rate mortgage is that the loan holder’s monthly payments will never change. The prime rate can fluctuate frequently and dramatically, but a fixed rate mortgage will protect you from the ups and downs of the market.
2. Consistent budgeting provides peace of mind
Again, because the monthly payments for a fixed rate mortgage will never change, it makes budgeting much easier. There’s a certain level of comfort afforded with this mortgage option – you can rest easy knowing that your payments will never increase.
3. Easy to understand
A fixed rate mortgage is the easiest one to understand. With a fixed rate, you don’t have to try and follow the fluctuations of the market or attempt to understand how the rising and falling numbers will affect your monthly payments. The same payment amount is made each month until your loan period is over. The end.
This is certainly a benefit for homeowners who are not particularly business or financially-minded – or who just don’t have the time to think about it.
Cons of fixed rates
Borrowing money from a financial institution is never going to be risk free. Consider these downsides to fixed rate loans before making any final decisions.
1. May miss out on lower rates
Naturally, those who lean towards a fixed rate mortgage are going to wonder whether they’re missing out on lower interest rates and lower monthly payments. Sometimes the difference between interest rates is significant and this can be frustrating for fixed mortgage holders.
2. Can be harder to qualify for
When interest rates are high, those looking for a fixed rate mortgage may find it harder than expected to qualify for the loan. That’s because higher rates mean higher monthly payments. Such monthly payments may be out of reach for many hopeful homeowners, especially younger individuals with less work experience or savings.
3. May cost more in the long term
It’s a fact that interest rates fluctuate and can’t be predicted. If the rates dip considerably lower than what you’ve locked in at, you’ll end up paying more over the term of your mortgage than if you’d chosen a variable rate.
4. Can really stretch your budget
While a fixed rate does mean that it’s easier to make and stick to a budget, if your rate is particularly high, it also means that other areas of your budget will feel the pinch. Paying more for a mortgage can mean there’s less money leftover for other household expenses.
5. Your options for switching are limited
If interest rates drop low enough to make you rethink your fixed rate, you do have options. You can usually switch to a variable rate, but you’ll have to begin a new term at the same time and there may be penalties to pay.
Want an idea of what your monthly mortgage payments would look like? Learn more about our free mortgage calculator here.
Pros of variable rates
On the other hand, there are also benefits to choosing a variable rate mortgage. These are quite different from those associated with fixed rates.
1. Tend to be less expensive over time
It may come as a surprise to learn that variable rate mortgages tend to be less expensive over time. Because this loan format is less risky for lending institutions, the rates tend to be quite low. And low interest rates mean lower payments, which is a nice benefit for mortgage holders.
2. Can take advantage of lower interest rates
The market will sometimes take a turn and provide variable rate mortgage holders with especially low rates. This means that your payments could be especially low for a period of time, freeing up your finances for other purposes. And while they aren’t a regular occurrence, these occasional rate drops can be a financial boon.
3. Can still switch to a fixed rate
Yes, you do have the ability to switch to a fixed mortgage when rates go considerably low. You’ll have to stick with your current lender and likely start a new term, but there won’t be any penalties. It’s not a move everyone should make, but it’s nice to know you have the option.
4. Less penalty for breaking contract
With a fixed mortgage, a homeowner breaking their mortgage contract usually pays either 3 months of interest or the interest rate differential, whichever is more. Breaking a variable mortgage, though, involves less of a financial penalty. In this case, the homeowner is charged only 3 months of interest. And since variable mortgages most often enjoy lower interest rates than their fixed counterparts, these payments will be lower.
Cons of variable rates
As with their fixed counterparts, there are several disadvantages to mortgages with variable rates. You should consider all sides of the argument before settling on the type of loan that’s best for you and your family.
1. Risk interest rates going up
Variable rate mortgage holders can experience frustration when interest rates are especially high. Especially if they haven’t budgeted accordingly, high interest rates can be difficult for homeowners to deal with and can affect their finances in extreme ways.
2. Qualifying can be difficult
Lenders usually use the benchmark rate set by the Bank of Canada, which is typically quite high. Their aim is to make sure that you can still handle your payments if interest rates get especially high.
3. Inconsistent monthly payments
As previously discussed, the monthly payments associated with a variable mortgage are likely not going to be consistent. This can make budgeting more difficult and can be anxiety-inducing for homeowners trying to manage their finances. Stability is not often an option with this type of mortgage.
4. Can take longer to pay off
The ratio of principle/interest that your monthly payment covers becomes pretty skewed if the prime rate goes up considerably. If that happens, you’re paying less on the principle, which means it can take longer to pay the whole mortgage down.
How to choose between fixed rates and variable rates
In order to choose the type of mortgage that’s best for you and your family, there are several details to discuss and consider.
Speaking at length with a mortgage broker or other type of financial advisor is always recommended, and it’s likely that these questions will come up during your conversations.
- How large of a mortgage payment can I afford right now? You may be looking forward to a raise, a new job, or even an inheritance later down the road – but what you can afford at this moment is what’s most important. Consider what you can reasonably set aside for a monthly payment at this time and go from there. More money in the future just means you’ll be even more comfortable making the payments you can make now.
- What’s the current rate? Ask your mortgage specialist about the current prime rate and how that would affect your monthly payments. This is important information no matter which type of mortgage you end up with.
- How long will I live on the property? How long should my loan term be? These questions are surprisingly related. If you’re not likely to stay in the home for more than 5 years, for instance, it might not be worth your while to go with a 10 year fixed mortgage. Talk to your mortgage professional about your expectations in these areas.
- Are interest rates likely to head in a certain direction in the near future? Your mortgage professional will have tips and tools to help predict interest rate variations for the near future. This information can be particularly helpful if you’re considering a variable mortgage.
- Is your budget so tight that you need to know exactly what your payments will be? Do you expect to maintain this tight budget in the future? If your finances are this tight, the unpredictability of a variable rate mortgage is likely not for you. If predictability and stability are necessary for the foreseeable future, your mortgage professional will likely point you towards a fixed mortgage.
With these questions in mind, let’s look over some scenarios where you might go with one over the other.
Example situations for choosing fixed rates
Everyone’s financial situation is different, and there will always be various scenarios that will push people towards a certain type of mortgage.
If you find yourself in any of the following situations, opting for fixed rates is likely the best decision.
- You can’t afford a spike in interest rates. Many families have a strict monthly budget and a hike in interest rates could wreak havoc. It’s not unusual at all. If this is the case, you’re much better off opting for a fixed rate mortgage as it provides predictable, unchanging monthly payments.
- You have a co-signer and are worried about affecting their credit. To maintain peace of mind and keep from affecting anyone else’s credit or finances, a fixed rate mortgage is going to be your best bet. Knowing exactly how much the mortgage payment is going to be each month is essential for sticking to a budget and ensuring you have the necessary funds ready. All things considered, fixed rates are the safer option.
- Interest rates for fixed mortgages are currently low. If the rates for fixed mortgages are similar to variable rates, this is a good time to lock it in. Especially if you’re already on the fence about which to choose, this situation should easily point you in the right direction.
Example situations for choosing variable rates
There are also many scenarios that will push an individual towards a variable rate mortgage. If you’re at all thinking along these lines, a variable rate mortgage is your best bet.
- You’re in the military or some other occupation where frequent relocation is necessary. Individuals who know they aren’t going to stay in the same home for more than a few years can certainly benefit from a variable rate mortgage. Remember, the penalties for breaking a variable mortgage are usually less severe than with a fixed mortgage.
- Missing out on the best deals is something that always bothers you. Rather than missing opportunities for especially low interest rates as they occur, going with a variable rate mortgage can ensure you pay the lowest price at the best times. Plus, you may be able to switch to fixed during ideal circumstances.
What are your thoughts on fixed vs. variable rate mortgages?
To summarize, variable and fixed mortgages are quite different.
Fixed rate mortgages offer stability, are great for those with strict budgets, and usually involve higher interest rates. Variable rate mortgages can save you money in the long run when rates trend downward and are less expensive to break, but your scheduled payments will fluctuate.
Which of these two options sounds right for you? Why did you choose one over the other?
Leave us a comment below and let us know!
FAQ
What is a variable rate mortgage?
A variable rate mortgage is one where the interest rate floats up and down, as dictated by the market. This means that your payments may be inconsistent – you may have to pay large amounts some months and less on others, depending what the interest rate is at the time. While this can be frustrating, it can also save you money by taking advantage of low rates when available.
What is a fixed rate mortgage?
A fixed rate mortgage is one where your mortgage is tied to one specific interest amount that doesn’t change for the length of your term. This means that your payments are always consistent, making it easier to budget. However, it can mean that you’ll miss out on lower interest rates when the market dips down.
Which is better: fixed rates vs. variable rates?
Both fixed and variable rate mortgages have their pros and cons, so neither is better than the other. Variable rates can offer more savings in the long run, but fixed rates are easier for budgeting purposes. Discussing the options with your mortgage professional or financial advisor can help decide which option is best for you.
What are the best mortgage rates in Canada?
The best mortgage rates in Canada usually come from online banks, and we often find Tangerine at the top of the list. You can see our mortgage rate comparison here.
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