Variable Rate vs Fixed Rate Mortgages In The Current Market

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The COVID-19 pandemic has had a widespread effect on the Canadian economy. It has caused high levels of unemployment and has slowed the bolstering home sale numbers typically experienced in Spring and Summer. Despite these effects on the economy, government programs and funding have helped keep the housing market relatively stable for the time being.

The Bank of Canada rate cuts are one of the major reasons the housing and mortgage markets are staying as stable as they are. As the bank's key interest rate is hovering at 0.25%, mortgage lending rates have also dropped to a historic low. Both variable and fixed interest rates are at record breaking lows. As a result, Canadians have been scrambling to lock in great low mortgage rates for their mortgage refinance or on new home purchase mortgages before it is too late. However, it also leaves homeowners and homebuyers questioning whether a variable rate or a fixed rate mortgage will be better for their financial future. Before you can make the right decision on which option is the best for you, it is important to understand the difference between, and the benefits and risks associated with, both variable rate mortgages and fixed rate mortgages.

What is a Variable Rate Mortgage?

A variable rate mortgage allows you to lock in your mortgage payments for the duration of your term, even if mortgage rates are fluctuating. If rates go up, more of your payment is used to pay down the interest. If rates go down, more of your payment is used to lower your principal. Variable rate mortgages make it easier for you to take advantage of falling interest rates during your term but also make you more vulnerable if interest rates go up too high. It is also important to mention that you will have the freedom to convert to a fixed rate mortgage at any time without suffering penalties.

What is a Fixed Rate Mortgage?

Fixed rate mortgages allow you to set a set constant mortgage rate combined with consistent mortgage payments for the duration of your term. Your mortgage payments are locked in at the beginning of your term and give you the security of knowing exactly how much your payments will be regardless of increasing or decreasing mortgage rates. For the most part, fixed rate mortgages are closed, meaning that you will incur additional costs in the form of prepayment penalties if you pay off your mortgage prior to its maturity. You can choose to have your fixed rate mortgage open, which is not a very common option unless you choose a private mortgage , but it will allow you to pay off your mortgage at any time.

Now that you know the basics, which is right for you?

Mortgage rates are expected to stay low until the economy starts to show real signs of recovery from the impact of COVID-19. While unemployment levels remain high and economic trends are seen as unpredictable and risky at the moment, interest rates will likely stay low in order to help stimulate the recovery.

According to our long list of lenders, the lowest current 5-year fixed rate is held at 1.85% while the lowest 5-year variable rate is held at 1.8%. These are some of the lowest rates ever seen in Canadian history.

Fixed rates tend to be higher than variable rates because they offer a sense of security to the borrower due to the assurance that the rate will remain constant throughout their mortgage term. With a fixed rate mortgage, you know exactly how much you will be paying towards your principal each and every month. Borrowers that value consistency and predictability tend to prefer a fixed rate for their mortgage over a variable rate. In the current climate, fixed rates are so drastically low that they can almost only go up from here and pose a bigger risk to lenders while providing a sense of security to borrowers. If you would be more comfortable knowing that your rate will stay consistent for the duration of your term, it is a great time to get a fixed mortgage rate for a new purchase to to lower your current monthly mortgage payments by refinancing your mortgage . If you are struggling with high interest debt payments, then you can also look into taking equity out of your home for the purposes of debt consolidation .

Variable rates tend to be slightly lower than fixed rates because they do not provide the borrower with any security on the consistency of their payments. However, if mortgage rates continue to drop, variable rate borrowers can experience the added benefit of paying down their mortgage quicker. As previously mentioned, the variable rates currently being offered are extremely low and experts are predicting they will remain low until the economy recovers. There is also a possibility that mortgage rates can drop even further in the future. It is important to note that in many cases you can switch to a fixed rate mortgage at any point in your term without incurring any additional penalties.

In conclusion, the choice between a variable and a fixed rate mortgage depends entirely on the type of borrower you are. If you prefer to have added security and are happy with the current rates being offered, then a fixed rate mortgage is the right choice for you. If you prefer the added risk in exchange for the potential of a lower rate in the future and believe mortgage rates will stay low, then a variable rate is a great option for you. Whichever type of mortgage you choose, now is a great time to get a new mortgage or refinance your existing mortgage!

Whether you are interested in a fixed or variable rate mortgage, Clover Mortgage can help you find the lowest rate available to you. Our team of experienced mortgage brokers will gladly answer all of your questions and work with you to help you make the best decision for your specific needs.

Call Clover Mortgage at 416-674-6222 or email us at to speak with a licenced mortgage broker who specializes in fixed and variable rate mortgages. Our team of experienced and licenced mortgage brokers will work endlessly to help you make the best decision for your financial future and will make sure you get the best rate available for your new mortgage or mortgage refinance.

Steven Tulman
Written By Steven Tulman
“Making the process of getting a mortgage an easy and enjoyable experience for every Clover Mortgage client!”