Quick answer: A fixed-rate mortgage keeps your interest rate the same for the term, so payments are predictable. A variable-rate mortgage moves with the lender’s prime rate, so your interest cost can rise or fall. Fixed usually suits borrowers who value certainty; variable may suit borrowers who can absorb changes.
Choosing between a fixed and variable mortgage is an important decision. The better fit depends on your plans, budget, risk tolerance and the full mortgage terms—not only the starting rate.
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage keeps the interest rate the same for the mortgage term. Payments are generally predictable, which can make budgeting easier.
Potential advantages:
• Predictable payments during the term
• Protection from rate increases during the term
• Easier long-term budgeting
Points to check:
• Fixed rates may start higher than some variable options
• The penalty for breaking the mortgage early can be significant
What is a Variable-Rate Mortgage?
A variable-rate mortgage changes with the lender’s prime rate. If prime goes down, your interest cost goes down; if it goes up, you pay more interest, either through a higher payment or a larger share of each payment going to interest, depending on the mortgage.
Potential advantages:
• The starting rate may be lower than a comparable fixed option
• Interest cost may decline if prime falls
• Some lenders use a three-month-interest penalty when the mortgage is broken
Points to check:
• Interest cost can rise if prime increases
• Payments or amortization can change depending on the product
Payment Types and Penalties to Check
Two details are often missed. First, with some variable mortgages the payment stays the same and the share going to interest changes when prime moves; with others (often called adjustable-rate mortgages) the payment itself changes. Second, breaking a fixed-rate mortgage early can cost much more than breaking a variable one, because fixed-rate penalties are often based on an interest rate differential. Ask the lender how both work before you sign.
Which One Should You Choose?
Consider how much payment change your budget can absorb, how long you expect to keep the mortgage, whether you may sell or refinance early, and how each lender calculates its penalty. Compare the complete contract before deciding.
Final Thoughts
Both mortgage types can be useful. The right choice depends on your situation and risk tolerance. Let’s discuss your goals and compare options that fit your plans.