Understanding Mortgages
Fixed vs. Variable Mortgage: What’s the Difference?
Both options can make sense. The better choice depends on how much stability, flexibility, and interest-rate uncertainty you are comfortable with.
Here's the Quick Answer
A fixed mortgage gives you a set interest rate for the term. A variable mortgage can change when the lender’s prime rate changes.
A fixed rate offers predictability because your interest rate stays the same throughout the mortgage term.
A variable rate can rise or fall during the term. It may provide more flexibility, but it also means accepting some uncertainty.
Why This Matters
How a Fixed Mortgage Works
With a fixed mortgage, your interest rate is set for the entire mortgage term. If you choose a five-year fixed mortgage, the rate remains the same for those five years.
Your required principal-and-interest payment will generally remain consistent during the term, provided you do not make changes to the mortgage.
This predictability can make budgeting easier because market rate changes will not affect your mortgage rate until the end of the term.
How a Variable Mortgage Works
A variable mortgage is usually priced in relation to the lender's prime rate. Your mortgage agreement may describe the rate as prime minus or plus a certain percentage.
If the lender's prime rate changes, the interest rate on your mortgage will also change.
Depending on the mortgage product, your required payment may change when rates move. With some variable mortgages, the payment may initially remain the same while the amount going toward interest and principal changes.
The Main Differences
| Fixed Mortgage | Variable Mortgage |
|---|---|
| The interest rate stays the same for the mortgage term. | The interest rate can change when the lender's prime rate changes. |
| Provides greater payment and budgeting certainty. | Requires more comfort with interest-rate and payment changes. |
| Breaking the mortgage early can sometimes result in a larger prepayment penalty. | The penalty is often based on three months of interest, although the mortgage contract should always be reviewed. |
| May appeal to someone who values predictability. | May appeal to someone who values flexibility and can manage changing rates. |
What Happens to Your Payment if Rates Change?
With a fixed mortgage, market rate changes do not affect your mortgage payment during the term.
With a variable mortgage, the effect depends on the product. Some variable mortgages have payments that increase or decrease when rates change.
Other products may keep the payment stable for a period of time. When rates rise, more of the payment goes toward interest and less goes toward reducing the mortgage balance.
In some cases, a significant rate increase can require a payment adjustment. It is important to understand exactly how the mortgage works before choosing it.
Mortgage Penalties Can Be Different
The cost of ending a mortgage before the term is complete can vary considerably.
A fixed mortgage penalty is commonly calculated using either three months of interest or an interest-rate differential, depending on the lender and mortgage agreement.
A variable mortgage penalty is often based on three months of interest, but mortgage contracts and lender policies can differ.
This can matter if you may sell your home, refinance, separate, relocate, or otherwise need to change your mortgage before the term ends.
Example
Choosing Between Stability and Flexibility
Imagine two homeowners are offered a fixed mortgage and a variable mortgage.
The first homeowner has a tight monthly budget and would find a payment increase stressful. They value knowing exactly what their mortgage payment will be, so a fixed mortgage may feel more comfortable.
The second homeowner has room in their budget, understands that rates may change, and may sell or refinance before the end of the term. They may place more value on the potential flexibility of a variable mortgage.
Neither borrower is automatically making the better decision. They are choosing based on different priorities.
Questions to Ask Before You Choose
Start by thinking beyond the rate being offered today.
How would you feel if your payment increased? A variable mortgage should still fit your budget if rates move higher.
Is payment stability important to you? Some homeowners sleep better knowing their rate and payment will not change during the term.
Could your plans change? Consider whether you may move, refinance, or need to restructure the mortgage before the term ends.
How does the mortgage penalty work? The penalty calculation can be just as important as the interest rate.
Can the variable mortgage be converted? Some lenders allow borrowers to convert into a fixed mortgage, but the available rate and remaining term conditions should be understood.
The Lowest Rate Is Not Always the Best Mortgage
A lower starting rate may be attractive, but the mortgage should also suit your life.
Features such as prepayment privileges, portability, penalty calculations, conversion options, and restrictions can all affect the true value of a mortgage.
You can compare how different rates and amortizations affect your payment using the Mortgage Payment Calculator.
Common Questions
Is a fixed mortgage safer than a variable mortgage?
A fixed mortgage offers more interest-rate and payment certainty. Whether it is the better choice depends on your budget, plans, and comfort with changing rates.
Does a variable mortgage payment always change when rates change?
Not always. Some variable mortgages have adjustable payments, while others may keep the payment stable for a period of time and change how much goes toward principal and interest.
Can I switch from a variable mortgage to a fixed mortgage?
Some lenders allow a variable mortgage to be converted into a fixed mortgage. The available fixed rate, term, and conditions will depend on the lender and mortgage agreement.
Which mortgage usually has the smaller penalty?
Variable mortgage penalties are often based on three months of interest. Fixed mortgage penalties may use either three months of interest or an interest-rate differential. The exact calculation depends on the lender and contract.
Is variable always cheaper over time?
No. A variable mortgage may cost less during some periods and more during others. Future interest-rate movements cannot be known in advance.
Should I choose the mortgage with the lowest rate?
Not necessarily. The rate matters, but penalties, prepayment options, portability, restrictions, and how well the mortgage fits your plans also matter.
Helpful Tool
Compare Your Mortgage Payments
Use the Mortgage Payment Calculator to compare how different interest rates, mortgage amounts, payment frequencies, and amortizations may affect your payment.
Try the Mortgage Payment CalculatorWhat to Explore Next
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Still Have Questions?
Choosing between fixed and variable is personal. I would be happy to walk you through how each option could affect your payment, flexibility, and plans so you can choose with confidence.
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