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Fixed or Variable Rate Mortgages: Which is Right For You?

From the security of a fixed rate mortgage to the flexibility of a variable rate mortgage, you have several choices when it comes to interest rates.

What is a Fixed Rate Mortgage?

The interest rate for a fixed rate mortgage is locked in for the full term of the mortgage. Payments are set in advance for the term, providing you with the security of knowing precisely how much your payments will be throughout the entire term. Fixed rate mortgages can be open (may be paid off at any time without breakage costs) or closed (breakage costs apply if paid off prior to maturity).

What is a Variable Rate Mortgage?

With a variable rate mortgage, mortgage payments are set for the term, even though interest rates may fluctuate during that time. If interest rates go down, more of the payment is applied to reduce the principal; if rates go up, more of the payment is applied to payment of interest. Variable rate mortgages may be open or closed.

A variable rate mortgage provides you with the flexibility to take advantage of falling interest rates and to convert to a fixed rate mortgage at any time.

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Compare Fixed vs. Variable Rate Mortgages: Which is Better?

Before choosing fixed or variable rate mortgages, understanding their benefits and considerations can help you make an informed decision that aligns with your financial goals.

Responsive Table Example
Benefits Considerations
Fixed Rate Mortgage
  • Consistent Payments: Your monthly principal and interest payments remain the same throughout the mortgage term.
  • Budget-Friendly: With predictable payments, you can plan your finances more effectively, knowing exactly how much you need to set aside each month.
  • Rate Protection: You are shielded from rising market interest rates, ensuring your payments don't increase even if rates go up.
  • Higher Starting Rate: Fixed rates often begin higher than variable rates, which means you might pay more initially.
  • Missed Opportunities: If market interest rates drop, you won't benefit from lower rates unless you refinance or renew your mortgage.
  • Prepayment Penalties: If you decide to sell or refinance and break a fixed rate mortgage contract early, it can result in significant penalties.
Variable Rate Mortgage
  • Potential Savings: Variable rates have often been lower than fixed rates, potentially saving you money over the life of the mortgage.
  • Lower Penalties: Penalties for breaking a variable rate mortgage early are typically much lower.
  • Flexibility: Most lenders allow you to switch to a fixed-rate mortgage at any time without incurring a penalty.
  • Payment Uncertainty: As interest rates fluctuate, your payments or the principal-to-interest ratio may change, making it more difficult to budget effectively.
  • Rate Increase Risk: If interest rates rise significantly, your payments may increase, or a larger portion of your payment may go toward interest, potentially extending the time it takes to pay off your mortgage.
  • Risk Tolerance: Variable-rate mortgages may not be ideal if you prefer financial stability or have limited room in your budget to accommodate potential payment increases.