A fixed rate is
A loan where the rate and amount of the mortgage paid off stays the same through the term of the loan. For example, if you have an interest rate of 3.44% on a 5-year fixed mortgage, the rate will be the exact same all 5 years of the term and your payments will not change. The amount of principal paid off will also stay the same.
A variable rate
A loan where the rate may change up or down over the term of the mortgage based on market conditions. Payments will stay the same, but the amount of mortgage paid off will increase or decrease based on the rate changes. For example, if you have a 2.6% 5-year variable mortgage, the rate may go down to be 2.6% during years 3-5. Monthly payments will stay the same, however, the amount of the mortgage paid off will have increased because of the lowered rate.
What do most people do?
In Canada, more people choose a fixed rate mortgage. In fact 80% of recent buyers chose a fixed rate (84% of first time home buyers chose to go fixed).
What are the pros / Cons
Pros - Security, many first time home buyers do not understand all of the fees associated with home ownership. With a fixed rate, the borrower knows the payment price through the life of the term, so it allows them to budget accordingly. Further, if rates go up, their fixed rate will not change. So it protects the borrower if rates were to go above their current fixed rate.
Cons - The borrower may not save as much money as they could if they chose a variable rate mortgage and rates go down. Also, portability costs can be higher with a fixed rate mortgage vs. variable.
Pros - Variable rate mortgages over the last 10 years on average have saved consumers more money than fixed. Also, with rates going up in Canada in 2018, most variable rate mortgages allow consumer to switch over to a fixed rate mortgage at any time. Portability can be a lot more affordable with a variable rate mortgage.
Cons - the fear of the unknown. Rates can increase at any time. This means that even though people saved money in the past, there is still the possibility that rates can rise to a level where a variable rate mortgage will cost more than a fixed.
Who is it for
Fixed - a more cost conscious person who wants to be assured that their payments won’t change over the term of their mortgage. We recommend fixed rate mortgages for first time homebuyers
Variable - someone who is willing to take more risk and potentially save more money over the term of their mortgage. On average, the variable mortgage saves consumers more money during normal market periods. We are more likely to recommend a variable rate mortgage to someone who has owned a home before.