Understanding Fixed, Variable, and Adjustable-Rate Mortgages: A Simple Guide

A Simple Breakdown of Fixed, Variable, and Adjustable-Rate Mortgages

With mortgage rates being a hot topic over the past few years, deciding on the right mortgage type can feel overwhelming, especially with so many choices available.

Whether you’re a first-time homebuyer or considering refinancing, understanding how fixed, variable, and adjustable-rate mortgages (ARMs) work can help you make a confident decision.

Here’s a straightforward guide to these options.

Fixed-Rate Mortgages: Stability and Predictability

Fixed-rate mortgages remain a go-to option for many borrowers. In fact, a 2024 consumer survey by Mortgage Professionals Canada found that 75% of borrowers selected a fixed-rate mortgage. However, as the Bank of Canada introduced rate cuts later in the year, interest in variable rates started to rise.

Unlike variable or adjustable-rate mortgages, fixed-rate mortgages are not directly affected by changes to the Bank of Canada’s policy rate. The interest rate remains the same for the entire term, keeping monthly principal and interest payments consistent, making budgeting easier.

Who Should Consider a Fixed-Rate Mortgage?

This option is ideal for borrowers who value stability and plan to stay in their home for at least the duration of their mortgage term. It’s also a solid choice if you anticipate interest rates increasing.

Advantages:

✔ Predictable monthly payments throughout the term

✔ Protection from rising interest rates

Things to Keep in Mind:

➤ Typically, the starting rate is higher than variable or adjustable options

➤ Breaking the mortgage early often results in higher prepayment penalties

➤ Less flexibility if rates drop during your term

Variable-Rate Mortgages: Potential Savings with Some Risk

With a variable-rate mortgage (VRM), your interest rate fluctuates based on your lender’s prime rate, which follows the Bank of Canada’s policy rate. While your monthly payment may remain fixed, the portion allocated to interest versus principal will shift as rates move up or down.

Who Should Consider a Variable-Rate Mortgage?

This option suits borrowers who are comfortable with some level of risk and believe interest rates may remain steady or decline during their term. It can also be a strategic choice for those considering selling or refinancing before the term ends, as variable-rate mortgages typically have more predictable penalties than fixed-rate mortgages.

Advantages:

✔ Historically lower rates compared to fixed mortgages

✔ Opportunity to save when rates decrease

✔ More predictable prepayment penalties

Things to Keep in Mind:

➤ Monthly payments may rise if interest rates go up

➤ Requires comfort with financial uncertainty

Adjustable-Rate Mortgages: Flexibility with More Frequent Changes

Not all lenders in Canada offer adjustable-rate mortgages (ARMs), but some do, including Scotiabank and National Bank, along with select Mortgage Finance Companies. An ARM differs from a VRM in that both your interest rate and monthly payment fluctuate with changes to your lender’s prime rate. While VRM payments typically remain stable while the interest-to-principal ratio shifts, ARM payments adjust immediately—often within 30 days—when prime changes.

Who Should Consider an Adjustable-Rate Mortgage?

This type of mortgage may be appealing to borrowers who want lower initial rates and have the financial flexibility to handle payment changes. Like VRMs, it can be a good option for those who may sell or refinance before the term is up, as penalties tend to be more predictable than with fixed-rate mortgages.

Advantages:

✔ Generally starts with a lower rate than fixed and variable options

✔ Potential for lower payments when interest rates drop

✔ Predictable prepayment penalties

Things to Keep in Mind:

➤ Payments can rise quickly if prime rate increases

➤ Less predictable monthly budgeting

Which Mortgage Type is Best for You?

Deciding between these mortgage options depends on your financial goals, risk tolerance, and how long you plan to stay in your home. A fixed-rate mortgage provides stability and peace of mind, while a variable-rate mortgage offers potential cost savings with some uncertainty.

Let’s Find the Best Fit for You

Choosing the right mortgage is an important decision, and I’m here to help. Whether you prioritize security or are open to taking a calculated risk for potential savings, I’ll guide you through the process.

📩 Get in touch today to explore your mortgage options and make an informed choice.

Book a call HERE and we can review your options!