Fixed vs. Adjustable Mortgages: Which Is Right for You?

The single biggest decision you’ll make when purchasing a mortgage is whether to opt for a fixed type or a variable type. That decision matters because it can affect more than just your monthly payments; it could also help determine the total cost of your mortgage over its lifetime.

Should you lock in the stability of a fixed rate, or enjoy the potential savings from a variable rate? The answer is it depends; it ultimately will depend on many factors, including your financial circumstance, level of risk tolerance and long-term goals.

In this piece, we’ll explain the differences between changeless and adjustable mortgage rates, lay out the pros and cons of each, while also detailing critical factors that should help guide your decision on which option is most appropriate for you.

What Is a Fixed Mortgage Rate?

A fixed rate simply means that the interest rate (and thus your monthly payments) remains the same for the duration of the loan – be it 3, 5, or even 10 years.

Key Features of Fixed Rates:

• Predictable payments every month
• Protection against interest rate increases
• Usually an initial rate higher than the variable

If you’re a risk-averse borrower who likes to know exactly what your home payment will be each month, this option is for you.

Variable Mortgage Rate: What Is It?

Interest on a variable mortgage rate (the type of interest rate that most Canadians have for their mortgage) is linked to the prime rate, though this fluctuates with changes in Bank of Canada policy rates.

Key Features of Variable Rates:

• Payments can go up or down if interest rates fluctuate.
• Typically, they begin lower than fixed rates
• Provide flexibility and potential cost savings in the long run

It is an option that can make sense for borrowers who are willing to accept a little risk and hassle in return for potential savings.

Fixed Rate Mortgages Pros and Cons

✅ Advantages:

• Predictability – You will be certain how much your payments are.
• Peace of mind – No worries about rate hikes.
• Budgets well – Great for people buying their first home.

❌ Disadvantages:

• Higher rates — Fixed rates tend to be higher than variable ones at the outset.
• Less flexibility – There is generally a significant cost to breaking a fixed mortgage early.
• Lost savings — If interest rates drop, you won’t be

Advantages and Disadvantages of an Adjustable Rate Mortgage

✅ Advantages:

• Lower intro rate – Typically less than fixed rates for an intro period.
• Potential savings — You will pay less in the end if rates remain low or decline.
• Smaller penalties: Breaking a variable mortgage generally results in lower penalties.

❌ Disadvantages:

• Uncertainty — Payments could increase if rates increase.
• Budgeting – Variable income may lead to unnecessary stress from unpredictable variables.
• No good if you’re averse to risk – You’ve got to be able to tolerate the ups and downs.

Factors to Consider

Risk Tolerance

Do you want to know exactly what your loan will look like, or are you okay with a little financial risk?

Financial Stability

Do you have budgetary space to absorb possible payment hikes?

Market Outlook

Do experts expect rates to rise or fall in the next week?

Mortgage Term

Short-term borrowers may find more upside in variable rates, while long-term borrowers might increasingly relish the fixed stability.

Future Plans

If it’s likely you will be selling your home or refinancing before then, a variable mortgage may offer you more flexibility with less of a penalty.

Hybrid: Best of Both?

Certain lenders have hybrid mortgages that offer a mash-up of fixed and variable rates. For instance, half of your mortgage may be fixed and the other half variable. This is a stability with adaptability tradeoff.

Real-Life Example

Scenario 1: The Safety-Seeker

A first-time homebuyer on a tight budget, Sarah is not (yet) one of those people. She opts for a 30-year, fixed-rate mortgage to ensure her payments never rise.

Scenario 2: The Risk-Taker

Daniel is stable with steady income and some savings. He opts for an adjustable-rate mortgage, believing he can cope with short-term uncertainties while possibly pocketing some money along the road.

FAQs

Q: Can I can change from a variable to fixed during my term mortgage?

Yes, almost all lenders allow you to lock into a fixed rate at any time.

Q: Which would be better for a first-time buyer?

Fixed rates can be a safer option for first-time buyers because they make budgeting easier.

Q: What if rates spike in a big way?

Your payments on an adjustable mortgage might go up. Some lenders recalculate the payment; others stretch out the amortization.

Q: Do penalties significantly differ in fixed and variable mortgages?

Yes. Incurring penalties to break a fixed mortgage can run in the thousands as borrowers will typically be charged interest rate differential (IRD), instead variable mortgages charge only 3 months’ interest.

Final Thoughts

Deciding between a fixed and variable mortgage rate isn’t about finding the “right” answer for you — it’s about discovering what makes sense for you.

• If you cherish security, peace of mind and stable payments, your best bet is a fixed rate.
• If you’re financially flexible, risk savvy and intrigued by the potential for larger savings over time, than a variable rate may be in your favor.

In the majority of cases, the best decision is made following exorel sapling with a mortgage broker who can offer individual advice and access to hundreds of lenders.