Fixed interest rates will stay the same for the entire term. Fixed interest rates are usually higher than variable interest rates.
A fixed interest rate mortgage may be better for you if you want to:
Keep your payments the same over the term of your mortgage
Know in advance how much of your mortgage (principal) will be paid off by the end of your term
Keep your interest rate the same because you think there is a good chance that market interest rates will go up over the term of your mortgage
A variable interest rate can increase and decrease during the term. If you choose a variable interest rate, you may be offered a lower interest rate than the one you’d get if you selected a fixed interest rate.
Keep in mind that the rise and fall of interest rates are difficult to predict. Consider how much of an increase in mortgage payments you’d be able to afford if interest rates rise. Note that between 2005 and 2015, interest rates varied from 0.5% to 4.75%.
Get information on current interest rates from the Bank of Canada or your lender’s website.
If the interest rate goes up, more of your payment will apply to interest, and less to the principal.
If the interest rate goes down, more of your payment will apply to the principal. You’ll pay off your mortgage faster.
If the market interest rates increase to a certain percentage or trigger point, your lender may increase your payments. This payment increase will make sure that you pay off your mortgage in the timeframe, that is, amortization period, you originally agreed upon with your lender. Your mortgage contract lists the trigger point.
With adjustable payments, the amount of your payment will change if the interest rate changes. A set amount of each payment will apply to the principal. The interest portion will change as the interest rates change. You’ll know in advance how much of the principal will be paid at the end of the term.
If the interest rate rises, your payments will increase. Make sure that you’ll be able to adjust your budget in case your payments increase.
If the interest rate goes down, your payments will decrease.