Fixed or Variable-Rate Mortgage: Which is Right for You?

When it comes to choosing a mortgage solution, there are many options available to you. One of the important decisions you must make is whether you prefer a fixed-rate or variable-rate mortgage. Both have their benefits, but one option may be more or less appropriate for you depending on your financial situation and comfort level. To help you make an informed decision, consider the facts below:

What is the different between fixed and variable rates?

When choosing a mortgage interest rate, you need to figure out what type of mortgage suits your financial situation, comfort level, and lifestyle.

Variable-Rate Mortgage

A variable-rate mortgage (sometimes called an adjustable-rate mortgage) will have fluctuating interest rates based on market conditions. Interest rates may rise, decline, or stay the same based on national and global financial conditions. There is a gamble here, as you could save money on the long-term, or you could pay more than you would have with a fixed rate mortgage.

With fixed payments, your monthly mortgage payment remains the same regardless of the interest rate (until you refinance). The difference is that more of the payment will be applied to the principal and you will pay off your mortgage faster if interest rates are low; more of the payment will be applied to interest and it will take longer to pay off your mortgage if interest rates are high. For this reason, the amortization period may be extended.

With adjustable payments, your payment amount changes as the interest rate changes. Your monthly payments could be higher, lower, or equal to the amount in the original mortgage agreement.

Fixed-Rate Mortgage

A fixed-rate mortgage has a locked-in interest rate that does not change over the term of the mortgage, regardless of market interest rates or market conditions.

Your payments will be the same across the whole amortization period and you will be able to always know what your payments are.

Hybrid Mortgages

Some lenders also offer hybrid mortgages which are a blend of the two. Part of the mortgage is fixed and protected from interest rate increases, while part of the mortgage is financed at a variable rate to provide partial benefits of market rates fall.

Which is best for you?

If you are someone who is knowledgeable of market patterns and think there is a good chance of market rates staying stable or falling, perhaps going with a variable interest rate is the choice for you. Variable rate is also a great way to pay down the principal faster, assuming the rates go down, because more of your payment is applied directly to the principal as opposed to interest. If you choose a variable-rate mortgage with adjustable payments, it is important that you have extra funds set aside in case your monthly payments rise. Consider the strategy of a variable rate mortgage but set your payment based on a higher fixed rate and watch your mortgage balance melt away.

Fixed interest rates are better for people who need to always predict what their mortgage payments will be. People who are on a fixed income, for example, are less likely to want to risk possibly having to pay more than what they predicted monthly just for the chance that they could end up paying more of their principal and less interest, depending on current market mortgage rates. If you feel market interest rates will rise over the term of your mortgage, a fixed-rate mortgage is preferable.

Any questions about fixed or variable interest rate mortgages should be directed to your mortgage broker. Each situation is different and personal advice is the only way to know what is truly best for you.