Home Bank accounts
Credit cards
Savings and investments
Home Banking Solutions
Credit Cards
Going Further
Tips and Tools
Wealth Management

Should you choose a fixed or variable rate on your mortgage?

03 March 2020 by National Bank
Fixed or variable rate for my mortgage?

If you're reading this, you're probably planning to buy a home. You'll have to make a lot of decisions to make over the coming months. One of the first is whether to opt for a fixed or variable interest rate.

Choosing between a fixed and a variable rate is like choosing between smooth and crunchy peanut butter. Which one should you pick? Spoiler alert: To find the right answer, you've got to listen to your gut.

We've done some research for you. Here are our results.

What is a mortgage interest rate anyway?

When you sign a mortgage deed, your bank locks in your interest rate. This rate determines your payments over a fixed period, generally 5 years. During this period, you'll be required to repay your loan or home equity line of credit at the frequency you chose when you signed the deed: weekly, every two weeks or monthly.

In simple terms, your rate is the percentage you pay and your term is the period you pay it over.

A fixed rate gives you stability

By definition, a fixed rate is just that: it doesn't change throughout the term of your loan. So you'll be paying the exact same amount each time you make a payment. Reassuring, isn't it? Since it's as certain as the sun rising in the morning (which you'll be able to see from the balcony of that high-rise condo you've been eyeing), a fixed rate is recommended for first-time home buyers, people who are on a tight budget and people who value financial stability. If you like to compare yourself to others, keep in mind that the vast majority of mortgage loans are fixed rate.

Fixed rates are generally a little higher than variable rates. But sometimes things go topsy-turvy, and variable rates swing higher than fixed rates.

How do variable rates work?

Variable rates are the crazy cousin of the family. You've guessed it—they vary. Variable rates change depending on the country's economic situation. The Bank of Canada's key rate can change each month, and variable mortgage rates change along with it. That means your mortgage payments could go up or down.

So over a five-year term, your variable rate—as the name implies—is likely to vary. These increases and decreases are generally gradual, and don't change drastically from payment to payment. For example, if you have a $200,000 mortgage loan, a 0.25% change in the key rate would increase your payments by $27 per month. All things considered, we recommend a variable rate for people who can manage fluctuations in their budget. If you get heartburn every time you have to pay more for your morning coffee, a variable rate probably isn't for you.

Open or closed loan? It's up to you!

If you follow the crowd and opt for a fixed rate, next you'll have to choose if you want an open or closed loan. What's that? First off, you should know that a fixed-rate loan can be open or closed, while a variable-rate loan is always closed.

If you choose an open mortgage loan, you can repay the principal at any time without penalty. By penalty, we mean a charge—you won't have to spend a few minutes in the box. What's the downside? Your rate will be higher. People who choose an open loan often have plans to resell in the near future. If you're looking to buy a condo that's seen better days so you can fix it up and flip it, an open loan may be right for you.

Closed loans have much longer terms—up to 10 years. They offer lower rates than an open mortgage, but you'll have to pay a penalty if you pay your loan down early.

Choosing made easy

During your first meeting, your mortgage advisor will talk you through your budget, your medium- and long-term needs and your risk tolerance. The key question you need to ask yourself is, "If my mortgage payments increased, would I still be able to pay them?"

You'll have a chance to go home and talk it over with your family so you can make an informed decision about which mortgage rate is right for you. Remember that your rate will be up for review when you renew your loan. At renewal, you'll also be able to adjust the amount and frequency of your payments for the next few years.

What step are you at?

Starting to look around?

Lock in preferred rates for a mortgage loan.

Get pre-approved

Ready to buy?

Get financing to realize your project.

Apply for a loan

Prefer to speak to an expert?

Contact an advisor for more information.

Find an advisor

Legal disclaimer

Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank of Canada.

The articles and information on this website are protected by the copyright laws in effect in Canada or other countries, as applicable. The copyrights on the articles and information belong to the National Bank of Canada or other persons. Any reproduction, redistribution, electronic communication, including indirectly via a hyperlink, in whole or in part, of these articles and information and any other use thereof that is not explicitly authorized is prohibited without the prior written consent of the copyright owner.

The contents of this website must not be interpreted, considered or used as if it were financial, legal, fiscal, or other advice. National Bank and its partners in contents will not be liable for any damages that you may incur from such use.

This article is provided by National Bank, its subsidiaries and group entities for information purposes only, and creates no legal or contractual obligation for National Bank, its subsidiaries and group entities. The details of this service offering and the conditions herein are subject to change.

The hyperlinks in this article may redirect to external websites not administered by National Bank. The Bank cannot be held liable for the content of external websites or any damages caused by their use.

Views expressed in this article are those of the person being interviewed. They do not necessarily reflect the opinions of National Bank or its subsidiaries. For financial or business advice, please consult your National Bank advisor, financial planner or an industry professional (e.g., accountant, tax specialist or lawyer).

Tags :