What’s the difference between a variable and fixed mortgage rate? Your choice depends on several factors, including your financial situation and your comfort level with the potential ‘risk’ of fluctuating rates and payments.
A fixed mortgage rate stays the same for the term of your mortgage, giving you predictable payments and stability. On the other hand, a variable mortgage rate can change over time, depending on market conditions, meaning your payments could go up or down.
Fixed
With a fixed mortgage rate, your rate and payment are locked in for the term, providing a safer option for consistent budgeting. However, if interest rates decrease, you won’t be able to take advantage of the lower rates without paying penalties and fees to break your mortgage.
Pros
- Rate and payment are fixed for the term
- More term-length options available
- Can make budgeting easier (for peace of mind)
Cons
- Higher penalty to break or switch
- May cost you more than a variable rate over time
- If rates fall, your fixed rate doesn’t change
Variable/Adjustable
With a variable mortgage rate (also known as an adjustable rate), your interest rate (and mortgage payment) can fluctuate based on changes in the bank’s prime rate. Typically offered as a 5-year term, this rate is often lower than a 5-year fixed rate due to the potential for changes.
Pros
- Usually a lower rate compared to a fixed-rate mortgage
- Over time, you may save more than with a fixed rate
- Lower penalty if you need to break or switch the mortgage
Cons
- If rates go up, your payments will increase as well
- Can make it harder to budget due to payment uncertainty
- Rates may rise during your term, leading to higher costs