A simple guide to fixed, variable, and adjustable-rate mortgages
With all eyes on mortgage rates the past couple years, choosing the right product can feel overwhelming, especially with so many options available.
Whether you’re buying your first home or looking to refinance, understanding the differences between fixed-rate, variable-rate, and adjustable-rate mortgages (ARMs) can make a big difference in your decision-making.
Here’s a quick and easy guide to help you understand these options.
Fixed-rate mortgages: Stability and predictability
A fixed-rate mortgage remains a popular choice among borrowers. According to a 2024 consumer survey by Mortgage Professionals Canada, 75% of borrowers opted for a fixed mortgage rate. However, interest in variable rates grew toward the end of the year as the Bank of Canada introduced several rate cuts.
Fixed-rate mortgage are not directly impacted by the Bank of Canada policy rate decisions. The interest rate stays constant throughout the term, ensuring consistent monthly payments for principal and interest, which makes budgeting easier.
Who is it for?
Fixed-rate mortgages are ideal for homeowners who prefer stability and plan to stay in their home for at least the length of the term selected. It’s also a good choice if you expect interest rates to rise in the future.
Key benefits:
Predictable payments for the term of your mortgage
Protection against rising interest rates
Considerations:
The initial rate may be higher compared to variable or adjustable-rate mortgages
Typically higher prepayment penalties if you break your mortgage before the end of the term
Less flexibility if rates decrease during your term
Variable-rate mortgages: Savings with some risk
A variable-rate mortgage (VRM) offers an interest rate that fluctuates with the lender’s prime rate, which is influenced by the Bank of Canada’s policy rate. While your payments may remain fixed, the portion of your payment going toward interest versus principal can change over time as rates rise or fall.
Who is it for?
Variable-rate mortgages suit borrowers who are comfortable with some risk and believe rates may decrease—or stay low—over the term of the mortgage. It also suits individuals that may look at selling or refinancing before their term is up, as the penalties are more predictable than fixed rate mortgages.
Key benefits:
Historically lower interest rates compared to fixed-rate mortgages
Potential savings when rates drop
Predictable pre-payment penalties
Considerations:
Monthly payments may increase if rates rise
Requires a tolerance for unpredictability
Adjustable-rate mortgages: A blend of flexibility and risk
An adjustable-rate mortgage (ARM) isn’t offered by all lenders in Canada. Scotiabank and National Bank are among Canada’s Big 6 banks who do offer it, and a number of Mortgage Finance Companies do as well. With an ARM, both your interest rate and monthly payment fluctuate with changes to the lender’s prime rate. Unlike a VRM, your payment changes immediately, typically within 30 days, when prime shifts, which can lead to greater monthly cost swings.
Who is it for?
ARMs may appeal to borrowers who want lower initial rates and have the financial flexibility to manage changes in monthly payments. As with VRMs, it may suit individuals that may look at selling or refinancing before their term is up, as the penalties are more predictable than fixed rate mortgages.
Key benefits:
Typically offers lower starting rates than fixed or variable options
Opportunity to pay less during periods of lower interest rates
Predictable pre-payment penalties
Considerations:
Payments can increase significantly if prime rate rises quickly
Less predictable budgeting
Which mortgage type is right for you?
Choosing between these options comes down to your financial goals, risk tolerance, and how long you plan to stay in your home. A fixed-rate mortgage provides peace of mind, while a variable-rate mortgage offers savings potential with some uncertainty.
Let’s find the right fit together
I’m here to help you weigh your options and choose the mortgage that works best for your unique situation. Whether you prioritize stability or are open to taking a calculated risk for potential savings, I’ll guide you every step of the way.
Reach out today to explore your options and make an informed decision about your mortgage.
Paul Macara
Mortgage Professional
(250) 857-4741
paul@macaramortgages.com