A lower mortgage rate is appealing. But what happens if the payment rises, you need to sell sooner than expected, or breaking the mortgage costs more than you saved?
Choosing between fixed and variable starts with understanding how each one would fit your budget—and your plans.
What are you actually locking in?
With a fixed-rate mortgage, your interest rate stays the same for the mortgage term. Your regular principal and interest payment stays consistent, which makes budgeting easier.
A five-year fixed mortgage keeps your interest rate the same for five years. That’s your mortgage term—not the total time you have to repay the loan. If you still have a balance when the term ends, you’ll need to renew or arrange other financing. Your interest rate and payment could change at that point.
That predictability can be useful when you’re buying your first home, adjusting to new expenses, or working with a budget that has little room for surprises.
The trade-off? If rates fall during your term, your fixed rate stays where it is. Getting a lower rate before the term ends may involve breaking the mortgage and paying a penalty.
Variable doesn’t always mean a changing payment
A variable mortgage rate generally moves with the lender’s prime rate. But how that affects your payment depends on the mortgage you choose.
There are two arrangements to understand:
- Adjustable payments: Your regular payment rises or falls as the interest rate changes.
- Fixed payments with a variable rate: Your payment may initially stay the same, while the amounts going toward interest and your mortgage balance change. When rates rise, more goes toward interest and less pays down what you owe.
That second option can catch borrowers off guard. Even if your payment stays the same, rising rates mean more of it goes toward interest and less toward paying down your mortgage.
At the trigger rate, your entire payment goes toward interest. If rates climb further, your payment may no longer cover all the interest owed. Depending on your contract, unpaid interest may be added to your balance, and your lender may require you to increase your payments or make another adjustment. Before signing, ask your lender how this would work for your mortgage.
Start with your budget, then compare rates
Before debating where interest rates might go, ask a more useful question: How much change could your household comfortably handle?
Have your lender or mortgage broker show you the proposed payment alongside examples with rates one and two percentage points higher. For a variable mortgage with fixed payments, ask how those increases would affect the balance you’d owe at renewal.
Then look at those figures beside your actual expenses: groceries, heating, insurance, property taxes, childcare, debt payments and regular savings.
If a higher mortgage payment would leave you relying on credit for everyday costs, that’s a reason to give payment stability serious weight. If you have room in your budget and savings to absorb changes, you may be more comfortable considering variable.
Also be honest about how you feel. Having the money to handle a rate increase and feeling comfortable with that uncertainty are two different things.
Planning to move? Read the exit terms
A mortgage needs to fit how long you expect to keep it.
If a job change, growing family or downsizing plan could lead to a move before your term ends, ask about the cost of paying out the mortgage early.
For many closed fixed-rate mortgages, the prepayment penalty is the greater of three months’ interest or an interest rate differential, calculated using the lender’s formula. Closed variable-rate mortgages commonly use three months’ interest. The contract determines the actual charge, so request an estimate for the mortgage you’re considering.
Ask if you can take your mortgage with you when you move, and what conditions you’ll need to meet. Even a portable mortgage has restrictions, so transferring it to another property isn’t guaranteed.
Those conditions can matter as much as the rate, especially if you expect to move within the next few years.
Ask for a comparison you can use
Have your mortgage professional compare fixed and variable options using the same mortgage amount, term length, amortization and payment schedule.. Ask them to explain:
- The starting payment and projected balance at the end of the term.
- What happens if rates rise, fall or stay unchanged.
- How much extra you can pay without a penalty.
- What it could cost to sell, refinance or switch lenders early.
- Whether you can convert from variable to fixed, and what conditions apply.
Some variable mortgages offer conversion to fixed, but If conversion is available, ask which fixed rate would apply, whether fees apply, and whether you would need to start a new term. Get those details before treating conversion as a backup plan.
If you’re buying, comparing mortgage options can help you see how the payments fit your budget before you commit. If you’re selling, checking your current mortgage for penalties and other costs can give you a clearer picture of what you’ll have available for your next home. And if renewal is coming up, it’s a good time to reassess what works for your budget and plans.
A REMAX Infinity REALTOR® can help you plan the real estate side of your purchase or sale. Your lender or mortgage broker can explain the financing options using your own numbers.
This article provides general information. Review mortgage costs, risks and contract terms with your lender or mortgage broker before making a decision.