Fixed or Variable Mortgage: Compare the Risks
A fixed mortgage keeps its rate unchanged during the term. A variable mortgage changes its rate according to the lender’s prime rate and your contract, but the way its payment responds depends on the product. Compare those mechanics, the early-exit charge and your budget before c
Key Takeaways
- A fixed mortgage keeps its rate during the term; a variable mortgage follows the contract’s rate-adjustment rules.
- Fixed-payment and adjustable-payment variable mortgages respond differently to rising rates.
- Compare budget stability, penalties, and repayment conditions before choosing fixed or variable.
A fixed mortgage keeps its rate unchanged during the term. A variable mortgage changes its rate according to the lender’s prime rate and your contract, but the way its payment responds depends on the product. Compare those mechanics, the early-exit charge and your budget before choosing.
Compare the payment structure
A variable-rate mortgage with adjustable payments changes the scheduled payment as the rate changes. A variable-rate mortgage with fixed payments initially changes the split between interest and principal; the contract may later require a payment adjustment or action at a trigger rate. Ask the lender how its product handles rising interest costs.
A fixed rate removes rate changes during the current term. It does not remove the need to renew, refinance or repay the remaining balance at maturity. None of these structures guarantees the lowest cost over an unknown future rate path.
Compare exit charges in writing
An early-exit penalty depends on the contract, balance, rates and remaining term. For a closed fixed mortgage, the charge is commonly the higher of three months’ interest and the lender’s interest rate differential. A variable mortgage often uses three months’ interest, but confirm the actual terms.
As a simplified hypothetical illustration, three months of simple interest on $500,000 at 4.50% is $5,625. This is not a payout quote or a fixed-rate interest differential calculation.
Ask for written payout estimates for the date you may leave. Portability, prepayment privileges and switching restrictions can change the result; use the FCAC’s guidance to frame your questions.
Choose a structure your budget supports
Compare offers using the same loan and amortization. Test payment and interest costs under more than one variable-rate path rather than holding today’s variable rate constant and calling the result a saving. Include fees and the cost of an early exit.
If you need a known rate during the term, consider fixed. If you can manage rate changes, examine the variable product’s payment rules carefully. A three-year fixed term offers another renewal horizon, not a guaranteed compromise on cost.
For dated lender examples, see our fixed mortgage guide.
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