Fixed Rate vs. Variable Rate Mortgage: Which is right for you?

Family moving into house

Whether you’re a first time home buyer, looking to switch, or renewing your mortgage, you will be faced with the decision to choose between a fixed rate mortgage or a variable rate mortgage. There are some key differences between fixed rate and variable rate mortgages, and understanding them will help you choose the type of mortgage that works best for you.

Differences Between Cambrian Fixed Rate and Variable Rate Mortgages

The key differences between the types of mortgages are:

  • Is the interest rate fixed or variable?
  • Is the mortgage open or closed?
  • Can you change the terms of the mortgage, transfer or pay it off without paying a penalty?
Cambrian Mortgages Fixed Rate Mortgage Variable Open Mortgage Variable Closed Mortgage
Interest Rate Fixed Rate Mortgages

The interest rate is fixed. It will stay the same throughout the specified term of the mortgage.
Variable Open Mortgage

The interest rate is variable. It will fluctuate according to changes in the variable prime rate.
Variable Closed Mortgage

The interest rate is variable. It will fluctuate according to changes in the mortgage rate market.
Term Fixed Rate Mortgages

You will need to choose a term of either 6 months or 1-5 years. Each term has a specific interest rate. The interest rate is fixed for the entire term.
Variable Open Mortgage

There is no term.
Variable Closed Mortgage

The term is set for 5 years
Flexibility Fixed Rate Mortgages

You will need to pay a penalty if you want to change, transfer or pay off the mortgage before the end of the term of the mortgage.
Variable Open Mortgage

You can lock in to a fixed rate mortgage at any time and you can choose any term.
You can change, transfer or pay off the mortgage at any time, without penalty.
Variable Closed Mortgage

You can lock in to a fixed rate mortgage at any time without penalty. You will need to choose a term that is equal or longer than the term remaining on the variable closed mortgage.
You will need to pay a penalty if you want to transfer or pay off the mortgage before the end of the 5 year term.
Additional Payments Fixed Rate Mortgages

You can pay an additional 20% of the original balance of the mortgage every year without penalty.
Variable Open Mortgage

You can pay any additional amount on the mortgage at any time without penalty.
Variable Closed Mortgage

You can pay an additional 20% of the original balance of the mortgage every year without penalty.
How to choose Fixed Rate Mortgages

A fixed rate mortgage gives you peace of mind as you know what your mortgage payment is and how much interest you will pay over the term of the mortgage.
The tradeoff is that a fixed rate mortgage may have a higher interest rate than a variable rate mortgage. And you cannot transfer or pay off the mortgage before your term expires, unless you pay a penalty.
Variable Open Mortgage

A variable open mortgage has no set term, meaning it is “open”, so you can switch to another mortgage or pay off your mortgage at any time, without penalty.
The tradeoff is that your rate can fluctuate up or down, so you should be comfortable with the possibility of your interest rate rising. If interest rates rise, more of your mortgage payment will go towards paying interest. But you can lock in to a fixed rate mortgage at any time.
Variable Closed Mortgage

A variable closed mortgage typically has a lower interest rate. And if interest rates are on the rise, you can always lock in to a fixed rate mortgage at any time.
The tradeoff is that your rate can fluctuate up or down, so you should be comfortable with the possibility of your interest rate rising. If interest rates rise, more of your mortgage payment will go towards paying interest. You cannot transfer or pay off the mortgage before your 5-year term expires, unless you pay a penalty.

Should I choose a fixed rate or variable rate mortgage?

When choosing the type of mortgage for you, it is important to look at your financial circumstances and goals. It’s not a matter of whether a fixed or variable mortgage is better, because the best mortgage is the one that works for you. It really depends on what you value most: peace of mind, increased flexibility or a lower rate.

Peace of Mind

We suggest assessing your comfort level with interest rate fluctuations. While going with a variable rate mortgage may save you money with a lower interest rate, if you won’t be able to sleep at night worrying if your interest rate may change, then the security of a fixed rate mortgage may be a better option for you.

If you have a specific goal, for instance, paying your mortgage off in time to send your child to the University of Manitoba, a fixed rate provides the peace of mind that you are on track to do so.

Increased Flexibility

A variable open mortgage is perfect for people who are looking for the most flexibility with their mortgage.  

If you are uncertain how long you will be staying in the home or want to be able to transfer or change your mortgage as you wish without paying a penalty, then Cambrian’s variable open mortgage would be a great fit for you.

Rate & Flexibility

If you’re looking for the lowest rate and are comfortable with interest rate fluctuations, consider Cambrian’s variable closed mortgage. Should interest rates start rising, you have the flexibility to convert to a Cambrian fixed rate mortgage without penalty.

A variable closed mortgage will not provide the same peace of mind as a fixed rate since your rate may fluctuate throughout your term but it may allow you to reach your goals earlier than with a fixed rate mortgage.

 

Financial Difference between Variable Closed and Fixed Rate Mortgages

At the end of the day, when assessing the value of a variable vs. fixed rate mortgage, you need to ask yourself if the difference between the fixed rate and the variable rate is enough to compensate for the risk of having the interest rate increase over the term of your mortgage.

Before making a decision, do some research into the Bank of Canada’s prime rate, as well as fixed mortgage rate trends. If you believe interest rates will remain stagnant or decline, a variable rate mortgage might be the way to go. But, if you believe interest rates could rise during the term of your mortgage, locking into a fixed rate mortgage offers peace of mind.


Bank of Canada Interest Rates 2010 - 2021

Once you are comfortable with the concept of fixed rate vs. variable rate mortgages, learn more about mortgage term lengths and how to choose the term that works best for you

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