As an independent mortgage broker serving clients mostly in the Greater Vancouver area, I have a mix of mortgage clients with fixed and variable rates. Here’s a look at the differences:
A fixed interest rate remains the same throughout the term of your loan (often five years). You can forecast how much interest you’ll pay over that term and how much of your payments will go towards principal (the amount you’ve borrowed and need to repay; interest is the cost of borrowing that money).
Unrestricted five-year fixed interest rates are as low as 2.69 per cent right now.
A variable rate fluctuates based on the lender’s prime rate. Some lenders offer a variable rate mortgage where your mortgage payments remain the same but if the prime rate increases, more of your payment will go towards interest.
However, the majority of lenders would increase your payment on the next payment date to cover the additional interest, so you’d need sufficient cash flow to cover the higher payments.
Variable rates are typically lower than fixed rates. A number of lenders are offering variable interest rates as low as 2.2 per cent with a five-year term, although there are some lenders offering even lower variable rates through more restricted mortgages.
When I’d recommend a fixed rate:
- If you can’t qualify for a variable rate (and Vancouver/Toronto are pricey markets so it’s not uncommon, especially for first-time buyers), then a five-year fixed rate is likely your best option. You’ll need more income to qualify for a variable rate or a term less than a five-year mortgage in case the rate increases in the future. With variable rates or terms shorter than five years fixed, you would need to qualify based on the posted rates (currently 4.64 per cent) to give your lender assurance you can still afford the mortgage if prime goes up or rates are higher at the end of your fixed term.
- If you’re extremely risk-averse, then you may get greater peace of mind from locking in a low fixed rate. I don’t recommend locking in terms longer than five years because 10 years is too long to plan for your mortgage rate. A lot can happen during that time. Young families or first-time buyers who want to minimize their risk and expenditures might fall into this category.
When I’d recommend a variable rate:
- If you think you might want to break your mortgage (say it’s an investment property and you decide to sell), it’s almost always cheaper to break a mortgage with a variable rate (fixed-rate mortgages can come with hefty prepayment penalties). The exception would be low-rate, high-penalty mortgage products, which you don’t want anyway if you’re planning to sell.
- If you want to pay off your mortgage quickly, it’s been shown over time most borrowers are better off with a variable rate. I have a variable rate mortgage myself.
In the end, it’s up to you to decide what type of mortgage you’re most comfortable with. Assuming you can qualify for a variable rate mortgage, it could save you money in the long run. However, with fixed interest rates so low right now, you could lock in a low rate for a small difference in payments.