The age-old “Fixed Rate Vs. Variable Rate” debate rages on as borrowers determine which one makes the most sense. Generally speaking, we’ve always preferred variable rates, but it ultimately depends on your financial profile and prevailing market conditions. The characteristics listed below for each type of mortgage assumes full features and no restrictions.
Fixed Rate Mortgage
- A fixed rate doesn’t change throughout the term, which offers you the peace of mind of knowing that your payment won’t change.
- You’ll pay the greater of 3 months interest or the interest rate differential (IRD) when you discharge the mortgage.
- If you sell your property, you can port the mortgage to a new property within 30-120 days without penalty.
- If you need to borrow additional money against your property, you can avoid a penalty by blending the rate.
Variable Rate Mortgage
- A variable rate fluctuates with the prime rate, which implies that it can go up or down during the term. Some variable-rate payments are constant; therefore, in the event the rate changes, the principal and interest equation will also change.
- You’ll only ever pay 3 months interest to break a variable rate mortgage, which is both nominal and predictable.
- A variable rate is typically not portable in terms of rate, but often times you’ll be able to avoid the penalty by staying with the same lender.
- If you need to borrow money against your property, you can’t blend the rate per se; however, you may be able to get your penalty waived by staying with the lender.
Typically, interest rates are higher on a fixed rate mortgage compared to the variable rate option, but this is not always the case. Over time, variable rates have outperformed fixed rates; however, the key advantage in our humble opinion is the penalty predictability. Circumstances change for people over time and mortgage requirements evolve.
Fixed Rate Vs. Variable Rate
There has been a lot of news in the media about rising rates again. Inevitably, people get scared and wonder whether or not they should lock in their variable rate mortgage. The answer is highly variable and depends on the following factors, read our latest article Should You Lock in Your Variable Rate?
We take comfort in knowing that the exit strategy for a variable mortgage is only 3 months interest, which is immaterial. Ultimately, it comes down to a borrower’s risk profile and market conditions. We’ve created a fixed vs variable payment calculator that will help you with the choice to see which one suits you best.