In recent years, mortgage rates have been a hot topic, leaving many homebuyers and homeowners wondering which mortgage option is best for them. With so many choices, it’s important to understand the key differences between fixed-rate, variable-rate, and adjustable-rate mortgages (ARMs) before making a decision.
Here’s a straightforward guide to help you navigate your options.
Fixed-Rate Mortgages: Stability and Predictability
A fixed-rate mortgage offers the certainty of an unchanging interest rate throughout the term of your loan. According to a 2024 survey by Mortgage Professionals Canada, 75% of borrowers opted for fixed-rate mortgages, though interest in variable-rate mortgages increased later in the year as the Bank of Canada introduced rate cuts.
Since fixed-rate mortgages are not directly impacted by Bank of Canada policy rate decisions, they provide stable monthly payments, making budgeting easier.
Best suited for:
Homeowners who prefer financial stability.
Those planning to stay in their home for the duration of the mortgage term.
Borrowers who expect interest rates to rise in the future.
Advantages:
Things to keep in mind:
Typically higher initial interest rates compared to variable or adjustable mortgages.
Breaking a fixed-rate mortgage can result in higher prepayment penalties.
Less flexibility if interest rates decrease during your term.
Variable-Rate Mortgages: Savings with Some Risk
A variable-rate mortgage (VRM) has an interest rate that fluctuates based on the lender’s prime rate, which is influenced by the Bank of Canada’s policy rate. While your payment amount may remain the same, the portion applied to interest versus principal can shift as rates change.
Best suited for:
Borrowers comfortable with some risk and potential rate fluctuations.
Those who believe rates may decrease or remain low.
Homeowners considering selling or refinancing before the mortgage term ends, as variable-rate mortgages typically have more predictable penalties than fixed-rate options.
Advantages:
Historically lower interest rates than fixed-rate mortgages.
Opportunity to save when interest rates drop.
More predictable prepayment penalties than fixed-rate mortgages.
Things to keep in mind:
Adjustable-Rate Mortgages: Flexibility with Market Sensitivity
An adjustable-rate mortgage (ARM) differs from a variable-rate mortgage in that both the interest rate and monthly payment change when the lender’s prime rate shifts. In Canada, ARMs are available from select lenders, including Scotiabank and National Bank, as well as several Mortgage Finance Companies.
Best suited for:
Advantages:
Typically offers lower starting rates than fixed or variable mortgages.
Can provide cost savings when interest rates decrease.
More predictable prepayment penalties than fixed-rate mortgages.
Things to keep in mind:
Payments adjust with interest rate changes, meaning costs can rise quickly.
Requires a budget that accommodates fluctuating monthly payments.
How to Choose the Right Mortgage for You
Your choice depends on factors like your financial goals, risk tolerance, and how long you plan to stay in your home. A fixed-rate mortgage offers peace of mind with stable payments, while a variable or adjustable-rate mortgage provides the potential for savings with more flexibility—but also more uncertainty.
Need Expert Guidance?
If you're unsure which option is best for you, I’m here to help. Whether you value stability or are open to the potential savings of a variable or adjustable rate, I’ll guide you through the decision-making process so you can move forward with confidence.
Contact me today to explore your mortgage options and find the right fit for your needs.