Buying a first home involves a number of important financial decisions. One of them is choosing between a fixed (closed) interest rate or a variable interest rate for one’s mortgage loan.
Either option comes with its own set of pros and cons, and the right choice depends on various factors, such as your level of risk tolerance and your financial situation.
What’s the Difference Between a Fixed and Variable Rate?
A fixed rate means that the interest rate on your mortgage remains the same for the entire term (commonly between 3 and 5 years).
Conversely, a variable rate fluctuates according to the prime rate established by the Bank of Canada. While usually set lower than the fixed rate at that time, it may increase if interest rates rise.
The Advantages and Disadvantages a Fixed (Closed) Rate Offers:
Advantages:
- Predictability: your payments are consistent month to month, which makes budgeting easier.
- Security: you’re protected against rate increases.
- Ideal if you’re on a tight budget and want to avoid surprises.
Disadvantages:
- Generally higher than the variable rate at the outset.
- Less flexibility if rates drop during your mortgage’s term.
The Advantages and Disadvantages a Variable Rate Offers:
Advantages:
- Often initially the lowest rate, which means lower monthly payments (unless rates rise).
- Potential savings if rates remain steady or fall.
Disadvantages:
- Uncertainty: your payments may increase if interest rates rise.
- Possibly stressful for those who prefer financial stability.
- May make long-term budget planning more difficult.
Pro Tip
According to Cynthia Laventure, financial security advisor and owner of the firm Mon choix financier, a good way to optimize a variable rate while protecting your budget is to realistically assess your payment capacity should interest rates go up. Would you be able to meet your loan repayments if the amount suddenly doubled overnight? If not, a fixed rate is probably best.
Which One Should You Choose for Your First Home?
There’s no one-size-fits-all answer, whether you’re a first-time buyer or not. At present, rates are projected to remain low, so a variable rate mortgage may be worth considering (provided you can afford the payments even if they double). Because variable rates tend to start out lower than fixed rates, borrowers will pay less interest.
And yet it’s important to remember they’re only predictions—experts do get it wrong! Note as well that some mortgage contracts allow you to lock in a variable rate at any time, giving you the best of both worlds. In any case, when facing instability or a restricted budget, I recommend a fixed rate, to preserve your peace of mind.
Financial security advisor
Before you decide, talk to a financial professional certified by the Autorités des marchés financiers (AMF) to ensure you fully understand your options and choose the one that’s right for you.
