Fixed Rate Mortgage Vs. Variable Rate Mortgage
“Should I go with a Fixed Rate or a Variable Rate?” is an oft-asked question in the
MonsterMortgage.ca office. And like most things in life, Variable Rate Mortgages and
Fixed Rate Mortgages each have their Pros and Cons – so here we will break down
the comparison and hopefully you may draw your own insights into which is best
What is a Fixed Rate Mortgage?
A Fixed Rate Mortgage is a mortgage of any given term (e.g., 1 year, 3 years, 5 years,
10 years) where the interest rate is set and not subject to change over the
course of your term. After agreeing to a Fixed Rate Mortgage, you’ve in essence
locked in a permanent rate for the rest of your term.
What is a Variable Rate Mortgage?
A Variable Rate Mortgage is a mortgage of any given term (usually 3 years or 5
years) where the interest rate moves in lock-step with your mortgage lender’s
When a mortgage institution or lender offers you a Variable Rate Mortgage, they
offer you a rate based off the Prime Rate. For example, your lender may offer you a
rate equal to Prime Rate minus 0.50% or (Prime – 0.5%).
Why is the rate offered to you worded this way? It is because the Prime Rate can
both increase and decrease.
What does it look like when the Prime Rate moves?
Let’s say the Prime Rate is 3% today. A mortgage lender in Canada may offer you a
mortgage of Prime minus 0.25% (Prime – 0.25%). This offer would mean that your
interest rate is actually 2.75% (3% minus 0.25%).
Perhaps one year later, the Bank of Canada announces a change that moves the
Prime Rate to 4%. Your Variable Rate Mortgage will also change too. Your
mortgage would now be 3.75% (4% minus 0.25%) and your mortgage lender
would adjust your mortgage payments to a higher amount to include this new
Keep in mind that the Prime Rate can also move down, or even remain flat for
long periods of time. In fact, the Prime Rate has remained at 3% between the period
of October 2010 to March 2014 and pundits expect the Prime Rate to remain at 3%
What influences the Prime Rate to move up and down?
The Prime Rate is largely influenced by the Bank of Canada’s Overnight Lending
Rate. When the Bank of Canada moves the Overnight Lending Rate, you’ll see the
Prime Rate move in the exact same manner.
How often does the Prime Rate move?
The Bank of Canada announces whether it is moving the Overnight Lending Rate
during scheduled announcement dates. Remember, the Overnight Lending Rate is
the key influencer of the Prime Rate – so if you have a Variable Rate Mortgage, these
are the dates to look out for.
The Bank of Canada typically holds 8 of these announcements each year and may
choose to increase, decrease or keep the Overnight Lending Rate at status quo.
What are the Benefits to a Fixed Rate Mortgage?
Your interest rate and your mortgage payments won’t change until it’s time to renew
your mortgage. The security and comfort of knowing your payments won’t change is
valuable to many people. Knowing your monthly mortgage payment also allows you
to confidently plan any budgets you may have in mind.
What are the Benefits to a Variable Rate Mortgage?
The interest rates offered by Variable Rate Mortgages are typically lower than
interest rates available with Fixed Rate Mortgages; however, there is no guarantee
that your rate won’t change.
What if I want to switch my Variable Rate Mortgage into a Fixed Rate Mortgage
during my term?
If you have a Variable Rate Mortgage, many mortgage lenders will allow you to
lock in your Variable Rate Mortgage into a Fixed Rate Mortgage. This is useful in an
environment where the Prime Rate is going up and Variable Rate Mortgages become
In fact, taking a Variable Rate Mortgage at a low interest rate and then “locking in”
when interest rates increase is a commonly used strategy among Variable Rate
Mortgage holders; unfortunately, many Canadian home-owners are unaware of this
WHAT YOUR BANK WON’T TELL YOU ABOUT ‘LOCKING IN’:
If you want to lock in your Variable Rate Mortgage into a fixed rate, here is what you
need to know:
1) Make sure that the bank or lender you have chosen allows its customers the
choice of locking in their Variable Rate Mortgage.
This is an option that you should expect with your Variable Rate Mortgage
– if this option isn’t available to you – consider taking your business to a
mortgage lender who will keep this option open for you.
2) A bank or mortgage lender who uses Posted Rates will use these rates
against you if you decide to lock-in your Variable Rate Mortgage! How?
Let’s say you have a Variable Rate Mortgage with a 5 year Term. After much
deliberation, you decide that you want to lock in your rate – that is to say,
you want to turn your Variable Rate Mortgage into a Fixed Rate Mortgage.
The issue then becomes – what is the new rate you will receive?
If your bank uses Posted Rates (whether online on their website or on a
chart located within their local branch), you’ll typically receive a rate that is
one percent or one and one-half percent off of their inflated posted rate. That
is to say, you won’t be receiving the best rate available when locking in.
(As of this writing, 5 year Fixed Rate Mortgages are available at 3.4% — the
Posted Rates for 5 year Fixed Rate Mortgages are listed at 5.24%)
For example, if you were locking in your mortgage today, you might receive a
rate equal to 3.7% — when rates at 3.4% are readily available.
Well, most people typically want the best rate available; however, you no
longer have leverage from a negotiation standpoint – after all, you can’t go
elsewhere with your mortgage without paying a penalty. At this point, not
even MonsterMortgage.ca can help!
3) Most banks and some mortgage lenders will lock you in but at the rate of
your original term – not the term you have remaining! What does this mean?
Once again, let’s say that you have a Variable Rate Mortgage with a 5 year
term. After 3 years, you decide that you want to lock in your Variable Rate
Mortgage – with two years remaining in your original 5 year term, you figure
that you’ll now be receiving a 2 year mortgage rate. Right? Wrong.
Your bank may choose to lock in at a 5 year mortgage rate; at an interest rate
significantly higher than what is available for 2 year mortgage rates.
Make sure your mortgage professional discusses these clauses and rules with
you before placing you into a Variable Rate Mortgage. There are mortgage
lenders in the Canadian market who do not result to these tactics to pad their
What if I want to switch my Fixed Rate Mortgage into a Variable Rate Mortgage
during my term?
If you have an open Fixed Rate Mortgage, can move into a Variable Rate Mortgage;
however, if you have a closed Fixed Rate Mortgage, you would have to break your
mortgage (and incur mortgage penalty costs) before moving into a Variable Rate
I’ve learned a lot about Fixed Rate Mortgages and Variable Rate Mortgages,
but which is best?
This is the age-old question that doesn’t always have a clear answer. A 2001 study by a
York University professor (http://www.ifid.ca/pdf_workingpapers/WP2001A.pdf) shows
that from the years 1950 through to the year 2000, a Variable Rate Mortgage in Canada
would have been better for Canadian home-owners 90% of the time when compared to a
fixed rate mortgage.
While it is difficult to argue with the historical results of the Variable Rate Mortgage
when it comes to saving money, the certainty that comes with a Fixed Rate Mortgage
is valuable to many home-owners who want to set their mortgage budget knowing that
movement in Canadian mortgage rates won’t matter to them.
Ultimately, the fixed rate mortgage provides assurance and certainty; however, that
comes at the price of a higher mortgage rate. If you, as a home-owner, are comfortable
with the idea of a variable rate product, whose mortgage rate will shift up and down
according to the prime rate, then a variable rate mortgage is the mortgage product for