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

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.

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.

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

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.

Fixed vs. Variable Mortgages FAQs

Should I choose fixed or variable rate mortgage?

Choosing between a fixed or variable rate mortgage depends on your priorities and comfort with risk.

A fixed rate mortgage locks in your interest rate for the full term, so your payments remain predictable throughout that period.

A variable rate mortgage fluctuates with interest rates. It may allow you to take advantage of falling interest rates and typically offers the option to convert to a fixed rate during the term.

When deciding, consider your financial situation, how long you plan to stay in your home, and how comfortable you are with potential rate changes. Many borrowers weigh the potential savings of a variable rate against the stability of a fixed rate to decide what works best for them.

Are variable rate mortgages cheaper?

Variable rate mortgages often start with lower interest rates than fixed rate mortgages.

With an RBC 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. Whether a variable mortgage ends up costing less depends on how interest rates move over time and how long you hold the mortgage.

If you prefer predictable payments, a fixed rate may give you more peace of mind. If you are open to some fluctuation in exchange for potential savings, a variable rate mortgage could make sense.

Can you switch from a variable to fixed rate mortgage?

Yes, most lenders allow you to convert a variable rate mortgage to a fixed rate during your term, typically at no cost, as long as the new term is equal or longer than the remaining variable term. Switching lets you lock in a stable interest rate and predictable payments.

The process usually involves contacting your lender, renegotiating your mortgage term, and agreeing on a new fixed rate. Before switching, review factors like potential prepayment charges and consider where interest rates may be heading. Discussing options with your lender can help you decide if the timing is right.

What are the downsides of choosing a variable rate mortgage instead of a fixed rate?

The main drawback of a variable rate mortgage is that your interest costs can change as rates move.

• If interest rates go down, more of your payment goes toward reducing your principal
• If interest rates go up, more of your payment goes toward interest

If rates rise significantly, less of your payment will go toward paying down your mortgage balance, which could extend your amortization period or increase overall interest costs over time.

In some cases, an increase in the RBC Prime Rate may result in a Triggering Interest Rate. This is when your regular payment is no longer enough to cover the interest portion on your mortgage. If this occurs, your mortgage payment will automatically increase to cover the accrued interest. Affected clients will automatically receive a Payment Change Notice advising of the increase.