Mortgage 101: Understanding Fixed & Variable Rate Mortgages

February 6, 2013

Choosing between a fixed and variable rate mortgage is an important decision for mortgage borrowers.
According to the most recent survey of Canadians, 65%  of us have fixed rate mortgages, 28% have variable rate mortgages and the remaining 7% of some sort of combination between the two. fixed vs variable rate mortgages(Source: CAAMP “Annual State of the Residential Mortgage Market in Canada” NOV 2012) This is despite the fact that variable rate mortgages have been the hands down winner outperforming fixed rate mortgages 90% of the time! Don’t believe me? Check out this popular study by York University professor Moshe Milevsky Floating Your Way To Prosperity where he compares fixed vs. variable rates over a 50 year period.
But before you start jumping to conclusions about which rate is better, you need to understand the differences between fixed and variable rate mortgages. To help you understand I’ve broken down the two mortgage options below.
Fixed rate mortgage

  • With a fixed interest rate mortgage, the interest rate is determined when you apply for your mortgage
  • This interest rate is set for the entire term and cannot change
  • The amount of your regular mortgage payments is also fixed and won’t change during the term of the mortgage
  • You know in advance the amount of interest you will have to pay, and therefore how much of the original loan amount will be paid off during the term.

Variable rate mortgage

  • The rate you pay in a variable rate mortgage is based on a formula of prime plus or minus a number
  • The interest rate you pay will fluctuate as the prime rate changes
  • As the prime rate changes so will your regular payments to the lender
  • Because the interest rate can fluctuate it is impossible to determine exactly how much interest you will pay to the lender during the term

When comparing the two options for yourself you might be tempted to jump to the conclusion that variable rate mortgages are the way to go since they have historically outperformed fixed rate mortgages but beware! Uncertainty of the future goes hand in hand with variable rate mortgages. You have to be adventurous and have the ability to changes in payments to work with a variable rate mortgage. At any time external economic forces can cause the prime rate to fluctuate which can change your payments. So the lower rate that typically accompanies a variable rate comes at a premium for added risk. It’s for this reason that 2/3 of borrowers choose a fixed rate mortgage.

Not sure which option is right for you?

I’d be happy to discuss which option is best for you and your unique circumstances. Click here to contact me.


Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too. He’s a second generation mortgage broker. Following in his father’s steps he joined the family mortgage business straight out of university.