Sign In
Sign In
Whether you're a first-time homebuyer or a current homeowner preparing for mortgage renewal, you might question whether to go with a variable or fixed-rate mortgage. It's an important decision to make, especially given the uncertainty of the current interest rate environment.
Here's everything you need to know about variable vs. fixed rate mortgages — what they are, the key differences, and how to figure out which one is right for you.
A fixed-rate mortgage stays the same for the entire term of your mortgage. A mortgage term is the length of time a loan contract is in effect, and they typically range from a few months to five years.1
With a fixed mortgage rate, you know exactly how much your payments will be each month, making it easy to budget.
There are two types of fixed-rate mortgages:
- Open mortgage: Allows you to pay off your mortgage ahead of time without a hefty prepayment penalty. But this flexibility comes at a cost, which is why open mortgages usually have a higher rate.
- Closed mortgage: Limits the amount you can pay off early. If you try to pay off more than your mortgage allows, you'll be hit with prepayment charges.
With a variable-rate mortgage, your interest rate can go up or down during your mortgage term based on your bank's prime rate. The prime rate is influenced by the Bank of Canada's policy interest rate.
Typically, your lender will offer you an interest rate of prime plus a certain percent.2 For example, if your lender offers a prime rate plus 1% and the prime rate is 5%, your rate is 6%.
There are two types of variable-rate mortgages:2
- Adjustable payment variable rate: Your interest rate fluctuates with the lender’s prime rate. In a declining rate environment, your payments will decrease. This can free up cash and help with affordability. If rates go up, your payments will rise.
- Fixed payment variable rate: Your payments are consistent each month, but if interest rates go up, more of your payment goes toward interest and less to your principal. If interest goes down, the opposite occurs.
Both fixed- and variable-rate mortgages have benefits as well as things to consider.
|
Benefits |
Considerations |
 Fixed Rate Mortgage |
|
|
 Variable Rate Mortgages |
|
|
Choosing between a fixed- and variable-rate mortgage is a highly personal decision. It depends on your individual financial goals — and your comfort level with risk. There's really no right or wrong answer!
If you value consistency or you're worried about rising interest rates, then a fixed-rate mortgage might give you more peace of mind. If you anticipate more rate cuts but aren't comfortable with a variable-rate mortgage, consider opting for a shorter-term fixed-rate mortgage. This way, you can see what happens to interest rates and then have the opportunity to make a change in the near future without breaking your mortgage.
On the other hand, if you think rates are going to drop, you're comfortable taking on some risk, and you have the financial ability to take on a potentially higher payment, a variable-rate mortgage might be the right fit.
If you're struggling to decide between a fixed- or variable-rate mortgage, you can get the best of both with the Scotia Total Equity Plan (STEP). It's a flexible borrowing plan tied to the equity in your home. STEP lets you choose from different types of mortgages. You can speak with a Scotia Home Financing Advisor to learn more.
One other factor to consider when deciding between a fixed vs. variable rate is which type of mortgage has historically been a better financial decision. History shows that short-term variable-rate mortgages have been the better financial choice, saving borrowers more than longer-term fixed-rate mortgages (e.g., five-year fixed rate).5
The bottom line
Choosing between a fixed-rate versus variable-rate mortgage is a big decision — and one with the potential to save you thousands of dollars. There's no right answer — to decide what's best for you, weigh the pros and cons for each option. Also, consider your risk tolerance and if you can financially (and emotionally) withstand a fluctuating interest rate and mortgage payment.
If you're looking for knowledgeable mortgage advice, speak with one of our Scotiabank Home Financing Advisors, who will help find the right mortgage solution for you.
