Fixed or Variable Mortgage. Which is better?

Fixed or Variable Mortgage. Which is better?


Team Mundi

Published in


09 May 2021

What's the Difference between Fixed and Variable Mortgage?

Whether you are aiming towards purchasing a property, refinancing your current home, or renewing, the odds are you're thinking about either a fixed or variable rate mortgage. The million-dollar question is, which is the better choice? The short answer is none. Both are good options, and determining which one is the best is largely dependent upon your needs and current financial situation. So here are some key points to help you decide which option suits you the best.

Let us first dive into fixed-rate mortgage. These contracts are the most popular and commonly promoted by most financial institutions. When you choose a fixed-rate mortgage, your negotiated interest rate is locked in for the agreed-upon term. Which, in essence, means that you are “fixing” your rate. The most common fixed term is for 5 years, but you as a consumer have the ability to fix your contract term, anywhere from a 6month up to a 10-year term!

Next, let’s get to what a variable mortgage is. This mortgage rate is something that is not fixed and is subject to change. Variable rates tend to fluctuate with the market. The variable rate has an open component which can be +/- to the prime rate. This means if the Bank of Canada's prime rate is 2.45% and your bank offers you prime minus 1%, your effective rate would be 1.45%. However, unlike a fixed rate, if prime increases, then so do your interest rate. This goes into saying that a variable rate is not guaranteed. However, the rates are typically lower than a fixed rate and have the lowest penalties due to the open component.

Now going on to the answer, which is the best option. None, it all comes down to what you are comfortable with and your objective with the current property.

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