A fixed mortgage or a variable mortgage? This can be one of the hardest decisions on your home owning journey and one of the most important decisions you will make when buying a home. It doesn’t matter if you are renewing your mortgage for the 10th time or if you are a first-time home buyer, this is a critical step involved with financing a home.  There are many differences between these two popular options and there are pros and cons of each. When deciding between these two options you will need to determine which one works best with your lifestyle, your budget and your risk tolerance. Of course, the team at LendMoola can help you determine what option is best for you. However, having a solid understanding of how a fixed mortgage and variable mortgage work, the differences between the two, and the risks of each are exceptionally important before you make the decision and sign the documents. 

• The interest rate remains the same for the entire term of the loan regardless of market fluctuations. This consistency and stability allow you to easily budget your monthly mortgage payments.

• It will lock your rate in for a period of time, called a term. Common terms are 1, 2, 3, 4 or 5 years.

• Fixed rate mortgages typically have a higher interest rate, but provide stability with that consistent rate through the entire term. 

• This option may be a good option for homeowners on a tight budget or those who want to avoid the risk of fluctuating interest rates.

• If interest rates drop, homeowners with fixed mortgages may end up paying more in interest than those with variable mortgages.

• If a special low-interest rate was offered, they may not have as much flexibility in terms of repayment, making it harder to pay off the mortgage faster.

• If you break a Fixed Rate Mortgage early, they often have a much bigger penalty that has to be paid. This is called an Interest Rate Differential Penalty.

• You cannot switch a Fixed Rate mortgage to a Variable Rate mortgage without breaking the mortgage term and paying the penalty.

• Variable mortgages often have a lower interest rate than a fixed mortgage, which can result in significant savings over the long-term, especially if interest rates remain low.

• They may offer more flexibility in their repayment terms, allowing homeowners to make additional payments or pay off their mortgage faster.

• The interest rate can fluctuate over time, which means that monthly mortgage payments can change based on changes in interest rates. This lack of predictability and stability can be challenging for homeowners on a budget. 

• If interest rates decrease, your payments will decrease.

• If interest rates rise, monthly mortgage payments can become unaffordable for some homeowners, resulting in financial strain.

• They may be a higher risk option for some homeowners who are not comfortable with the risk of fluctuating interest rates.

• You can often switch from a Variable Rate mortgage to a Fixed Rate mortgage with out any penalty.

Clearly both fixed mortgages and variable mortgages each have advantages and disadvantages. The best way to finance your mortgage will ultimately depend on your personal financial situation, risk tolerance, goals and priorities. If you want predictability and stability with your budget and in terms of monthly mortgage payments, then a fixed mortgage may be the best option for you and your family. If you're comfortable with the risk of fluctuating interest rates, your budget can handle the possible mortgage payment increases and your priority is to potentially save money over the long-term, a variable mortgage may be the better choice. Financing your home can be complicated and you want to be sure you are making the right decision for your situation and lifestyle.