Fixed Rate vs Variable Rate. What You Need To Know.

Have you heard your mortgage broker say “fixed rate” or “variable rate” and wondered what it meant? Or have you simply seen or heard these terms in finance or housing articles and conversations? This article will deep dive into the differences between a Fixed rate vs a Variable rate mortgage so you have all the information you need to make the right decision.

Firstly, what is a fixed rate mortgage? A fixed-rate mortgage charges a set interest that does not change throughout the term of the loan term. A fun way to remember the difference between the two is to think: fixed = always stable and stays the same.

However, a variable rate mortgage is a lot different than a Fixed-rate mortgage. With a variable mortgage, the mortgage interest rate can fluctuate during the term as the prime rate moves.   A fun way to remember the difference between the two is to think: Variable = Not consistent or having a fixed pattern.

Now we know the difference between the two, what are the pros and cons?

Benefits Of A Fixed-Rate Mortgage

  • Interest rates stay the same throughout the mortgage term making it easier to budget how much you would be spending every month.
  • Offers stability as you know how much is needed each month to pay off your mortgage. No surprises.

Cons Of A Fixed Rate Mortgage

  • Fixed rates are usually higher than a variable mortgage
  • If you pay the mortgage before the maturity date there can be a larger penalty to break it.
  • It is not possible to switch from a fixed rate mortgage to a variable without breaking the mortgage. 

Benefits of a Variable Rate Mortgage

  • Typically, the variable rate is lower than the fixed, in the first few years.
  • It is possible to break the mortgage and the penalty is typically lower than a fixed rate mortgage.
  • Homeowners can lock in the variable rate into a fixed rate at any time, without breaking the mortgage.

Cons of a Variable Rate Mortgage

  • Monthly payments can change making it difficult to budget. 
  • If the prime rate rises and your interest rate goes up accordingly, less of your payments will go towards the principal which could make the amortization period longer.

In conclusion, knowing the differences between the two mortgages helps as you shop for a new mortgage. Also, remember to make sure to ask your mortgage broker relevant questions so that you could understand in more detail what you are signing up for.