Fixed vs Variable Costs? Which is Better?
Understanding the differences between a fixed-rate mortgage and a variable rate mortgage is
important when considering a loan. Whether you are buying, refinancing, or doing a debt
consolidation, understanding the differences between fixed and variable interest rates can help
save you money and meet your financial goals.
• A Variable rate mortgage is where the mortgage payment is based on a benchmark that
can change thus affecting your mortgage payment. It can increase or decrease however
typically doesn’t fluctuate more than 0.25%. The Bank of Canada meets 8 times per year
and that is where they decide whether the prime rate shall make a change. All of my clients
are made aware of these changes and whether they should maintain their current
position or change.
• A fixed-rate mortgage is where your interest rate is set and stays the same for the entire
term of the loan.
• A variable-rate benefits borrowers in a declining interest rate market, when the Bank of
Canada prime lending rate drops so does your mortgage payment. If the Bank of
Canada raises the prime lending rate, your mortgage payment will increase.
• If the fluctuating mortgage payment affects your sleep, always worrying whether there
will be a change, it may not be the right mortgage product for you.
Which is Better: Fixed or Variable Rate Mortgage?
The simple answer is always, what are you most comfortable with? However, studies have
shown that over time, a borrower is likely to pay less interest overall with a variable rate
mortgage versus a fixed-rate loan. Historical trends aren’t necessarily indicative of future
The borrower must also consider the amortization period, the longer the amortization, the
greater the impact a change in interest rates will have on your payments.
Therefore, a Variable rate mortgage is beneficial in a decreasing interest rate environment,
however, when interest rates rise, so do your mortgage payments. You must be in a financial
position to handle the change in payments.
Another benefit of the variable rate mortgage is that if your plans are to sell your home before
your term is up, our penalty to get out is only 3 months of interest payments. If you are in a fixed-rate mortgage, your penalty is either the Interest Rate Differential (IRD) or 3 months interest, whichever is higher
This is something to consider as it would affect your bottom dollar you could pull from a sale.
The lender choice also makes a significant impact on the payout penalties as the big banks
change their penalty based on the posted rate rather than a contract rate. This could be the
difference of 13,000 with a major bank to $3500 with a monoline lender.
If you need professional mortgage advice, speak to our trusted Edmonton Mortgage Broker Eva
Neufeld. She will sit down and set out a plan not only for the short term but ensure it meets
your long-term financial goals.