Fixed or adjustable rate mortgage?

Fixed rate

As the name suggests, a fixed rate stays the same for the duration of the term you choose—typically one, two, three or five years. Although fixed rates are generally a little higher than adjustable rates, they offer the advantage of greater stability, making it easier for you to plan your budget.

A fixed rate is right for you if:

• You prefer to have steady payments for your entire mortgage term
• You don’t have a lot of wiggle room in your budget
• You’re concerned about a rise in interest rates in the short term and want to protect yourself

Adjustable rate

With an adjustable rate, the amount of your mortgage payment may vary based on fluctuations in your rate. Your rate will vary in line with financial institutions’ prime rates, which are generally tied to the key interest rate set by the Bank of Canada.

With most adjustable products, this means that if your interest rate drops, you’ll enjoy lower mortgage payments. In this case, keeping the amount of your payments the same is a good way for you to pay off your mortgage sooner. Conversely, an increase in interest rates will translate to higher mortgage payments.

Adjustable rates are generally lower than fixed rates, but you need to have the financial flexibility to absorb an eventual rate increase.

An adjustable rate is right for you if:

• Your tolerance for unexpected market variations is high
• Your financial situation allows you to take on higher mortgage payments if rates increase
• You expect there to be a drop in interest rates in the short term and want to take advantage

How to choose

Nobody can predict the future. That’s why it’s important to assess your situation and measure your risk tolerance so that you can set your priorities.

Do you prefer financial stability? Then, the predictability of a fixed rate would be a better fit for you. The fact that the rate stays the same for a set period will help you plan your budget.

Would you rather have lower payments? An adjustable rate will generally help you achieve that goal. If rates increase, most mortgage contracts will allow you to lock in at a fixed rate down the line.