When you’re getting ready to buy a home, one of the biggest decisions you’ll make is choosing the type of mortgage. In Canada, homebuyers generally have two main options: fixed-rate mortgages and variable-rate mortgages. Both options have their benefits and risks, and the best choice for you will depend on your financial situation and long-term goals. Let’s break down the differences and help you decide which might be the right fit for your needs.
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage is exactly what it sounds like: your interest rate is “fixed” for the length of your mortgage term. This means that no matter what happens with interest rates in the broader economy, your mortgage rate stays the same.
Benefits of a Fixed-Rate Mortgage:
- Stability and predictability: Since your rate doesn’t change, your mortgage payments stay the same throughout the term. This makes budgeting easier because you know exactly how much you’ll pay each month.
- Protection from rising rates: If interest rates rise over the term of your mortgage, you won’t be affected. This provides peace of mind, especially during times of economic uncertainty.
Risks of a Fixed-Rate Mortgage:
- Higher initial rates: Fixed-rate mortgages typically come with higher interest rates compared to variable-rate mortgages, at least in the beginning.
- Less flexibility: If rates drop significantly during your term, you won’t benefit from the lower rates unless you refinance, which could come with penalties.
What Is a Variable-Rate Mortgage?
A variable-rate mortgage, on the other hand, has an interest rate that can change over time. These rates are typically tied to the lender’s prime rate, which fluctuates based on the Bank of Canada’s interest rate decisions.
Benefits of a Variable-Rate Mortgage:
- Lower initial rates: Variable-rate mortgages often start with lower interest rates than fixed-rate mortgages, which can mean lower initial payments.
- Potential to save over time: If interest rates stay the same or drop, you’ll benefit from lower payments over the life of the mortgage.
Risks of a Variable-Rate Mortgage:
- Rate increases: If interest rates rise, so will your mortgage payments, which can make budgeting more difficult. This is the biggest risk with variable-rate mortgages.
- Uncertainty: Because rates can change, there’s less predictability compared to a fixed-rate mortgage. This may not be ideal for those who prefer stability.
Key Differences Between Fixed and Variable Mortgages
| Aspect | Fixed-Rate Mortgage | Variable-Rate Mortgage |
|---|---|---|
| Interest Rate | Fixed for the entire term | Changes based on market rates |
| Monthly Payments | Remain constant | Can fluctuate if rates change |
| Initial Rates | Typically higher | Generally lower at the start |
| Risk | Lower risk (stays the same) | Higher risk (can rise over time) |
| Best for | Those who want predictability and stability | Those who can tolerate some uncertainty for potential savings |
Scenarios Where a Fixed-Rate Mortgage Might Be Better
A fixed-rate mortgage can be the right choice if you value certainty. Here are some situations where you might lean towards this option:
- You have a tight budget: If your financial situation is such that an increase in mortgage payments would cause stress, a fixed-rate mortgage ensures you won’t have to worry about changing rates.
- You plan to stay in your home long-term: If you’re buying your forever home and want to lock in a predictable payment, the fixed-rate mortgage can give you peace of mind.
- Rates are historically low: If mortgage rates are at a historic low, locking in a fixed rate can protect you from future rate hikes.
Scenarios Where a Variable-Rate Mortgage Might Be Better
Variable-rate mortgages can be an excellent option for homeowners who can handle some fluctuation in payments. Here’s when a variable rate might be a good fit:
- You can tolerate risk: If your budget can handle fluctuations in your payments and you’re comfortable with the potential for rates to rise, a variable-rate mortgage might help you save money in the long run.
- You expect rates to drop: If you anticipate that the Bank of Canada will lower interest rates over time, a variable-rate mortgage allows you to benefit from potential rate reductions.
- You’re not staying in the home long-term: If you plan to sell your home in the near future, the lower initial rate of a variable mortgage can save you money during the time you own the property.
Hybrid Mortgages: A Middle Ground
For those who can’t decide between a fixed-rate and variable-rate mortgage, there’s another option: a hybrid mortgage. These mortgages allow you to split your loan into two parts, one with a fixed rate and one with a variable rate. This can provide a balance between the security of a fixed rate and the potential savings of a variable rate.
Benefits of a Hybrid Mortgage:
- Balanced risk: A hybrid mortgage spreads out the risk, protecting part of your loan from rising rates while still allowing some flexibility if rates fall.
- Customizable: You can often choose how much of your mortgage to allocate to each type of rate, tailoring it to your needs.
Making the Right Choice
Choosing between a fixed-rate and variable-rate mortgage depends on your financial goals, risk tolerance, and personal preferences. Here are some final tips to help you decide:
- Evaluate your risk tolerance: If you prefer peace of mind and stable payments, a fixed-rate mortgage is likely the better choice.
- Consider your future plans: If you’re planning on moving within a few years, the lower initial rates of a variable-rate mortgage could save you money.
- Keep an eye on the economy: Economic factors, like inflation and the Bank of Canada’s rate policy, will influence whether rates are likely to rise or fall. Be sure to consider these trends when choosing your mortgage type.
For more insights into mortgage options, you can check out our guides on BMO Mortgages, EQ Bank Mortgage Marketplace, and Nesto Mortgage Expert. These resources provide more detailed information on what different lenders offer and can help you make an informed decision.
The decision between a fixed and variable mortgage is personal and should be based on your financial situation, risk tolerance, and future plans. Both options have their pros and cons, and understanding them will help you make the best decision for your home-buying journey. Take your time, evaluate your options, and don’t hesitate to seek professional advice if needed.
