When it comes to interest rates, it is a good idea to understand the difference between a fixed rate and a variable rate when shopping for a mortgage.

A fixed rate mortgage is the most popular interest rate option. With a fixed interest rate, the mortgage payment you make each month will stay constant for the term of your mortgage.

With a variable rate mortgage, the interest rate is subject to fluctuate according to the prime lending rate set forth by your lender. Your payments will always be prime +/- a specified amount. However, it is important to note that this specific amount will never change; it is only the prime rate itself that is subject to change. 

If you purchased a home for $400,000 and secured a 5 year fixed rate of 2.59%, your monthly mortgage payments would be $1809.84 for the next five years. If you decided you wanted to go with a variable rate instead and discovered that your Lender had set a prime rate (P) of 2.70%, your Lender would offer you an interest rate of P +/- a certain amount. For example, if your Lender offered P-0.30%, your corresponding interest rate would be 2.40%. In this case, your monthly mortgage payment would start at $1772.01, but that number could increase or decrease if your Lender changes their prime rate throughout the course of your mortgage term.

Which Rate Works Best For Me?

Although your Broker will help you identify which kind of rate best suits your situation, it is beneficial for you to know exactly what that rate means for you.

The biggest advantage of using a fixed rate over a variable rate is that you know exactly what your payments will be for the term of your mortgage; there are no surprises. Although this rate is usually a little higher than the variable rate at the time of signing, some people prefer the security of knowing what their payments will be over the chance of saving some money.

Conversely, the biggest advantage to variable rates is that you may end up paying a lower amount of interest than you would with a fixed rate. The downside is that you are taking on the risk of having a fluctuating mortgage payment, so it may be difficult to budget ahead.

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as of October 24th, 2021

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