Variable vs Fixed Rate Mortgages

Dated: February 20 2024

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Variable Mortgage versus Fixed Rate Mortgages for Edmonton Home Buyers

In the past a variable rate was generally lower and a fixed rate was something that you paid a little more for but it gave you certainty. This is not always the case.

The question of what is the difference came up.

Investopedia.com defines:

A variable rate mortgage is a type of home loan in which the interest rate is not fixed. Instead, interest payments will be adjusted at a level above a specific benchmark or reference rate, such as the Prime Rate + 2 points. Lenders can offer borrowers variable rate interest over the life of a mortgage loan.

A fixed-rate mortgage has an interest rate that remains unchanged throughout the loan's term. So, your payments will remain the same each month. (However, the proportion of the principal and interest will change.) The fact that payments remain the same provides predictability, which makes budgeting easier.

Basically with a Fixed rate your payments wont change. As the mortgage gets paid off the amount of interest and principal you pay off will change but your payments stay the same.

The main advantage is that if interest rates go up then the borrower is protected from sudden or significant increases in the rate they are paying on their mortgage. Fixed rate mortgages are also easier to understand.

The disadvantage is that if interest rates go down you still pay the fixed rate that was agreed to and would need to refinance in order to potentially get a lower rate.

For variable rate mortgages, the rate is not fixed and changes if rates go up or down. This means that if rates go up, you pay more. If rates go down then you pay less.

So the factors to take into consideration is which are you more comfortable with and are you confident in predicting where interest rates will go?

Or, often a nudge of which of the two option is being offered at a lower rate right now can be the deciding factor.

When making any financial decision, get help from financial advisors.  As part of my team, I do have trusted mortgage brokers and many other professionals that I connect buyers and sellers to in order to support them in the often emotional process of buying or selling their home. We try our best to be a referral resource and support in simplifying the process.

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Derek Keet

Think RE/MAX Elite, think Derek Keet. With over 20 years of personal experience in residential, commercial, and rural transactions, Derek is an accomplished international business leader who brings ....

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