In order to help you decide which choice is right for you, refer to the chart below and contact us if you have any questions!
| Feature | Fixed-Rate Mortgage (FRM) | Variable-Rate Mortgage (VRM) | Adjustable-Rate Mortgage (ARM) |
| % of Canadians who chose in 2023 | ~95% | ~4.6% | % grouped with VRM |
| Interest Rate | Locked in for the entire term; does not change regardless of market conditions. | Tied to the lender’s prime rate; fluctuates with changes in the Bank of Canada’s policy rate. | Tied to the lender’s prime rate; fluctuates with market rates and payments adjust with rate changes. |
| Monthly Payment | Fixed throughout the term, offering stability and predictability. | Fixed payment amount, but the portion allocated to interest vs. principal adjusts as rates change. | Payment amount changes directly with interest rate fluctuations (increases or decreases). |
| Amortization Impact | Amortization remains constant throughout the term. | Amortization period may change if rates rise or fall significantly, as payments stay fixed. | Amortization remains constant since payments adjust to reflect interest rate changes. |
| Teaser Rates | Not applicable. | Not typically offered. | May include initial low “teaser” rates that may increase after a set period |
| Risk Tolerance | Best for borrowers who value stability and want to avoid risk from rising interest rates. | Suitable for borrowers comfortable with some risk and potential savings when rates are low. | Requires higher risk tolerance due to fluctuating payments, Budgeting can more challenging. |
| Budgeting | Simplifies budgeting. Payments are predictable and stable throughout the term. | Easier for budgeting compared to ARMs but requires adjustment at renewal if amortization changes significantly. | Harder to budget as payments vary with rate changes, potentially increasing significantly during high-rate periods. |
| Potential Savings | ** Historically higher initial rates (than variable or adjustable mortgages but offers long-term predictability. | ** Historically lower rates than fixed mortgages, offering potential savings when rates are stable or declining. | Offers savings during periods of low interest rates but can become costly if rates rise sharply. |
| Flexibility | Limited flexibility; breaking a fixed mortgage often incurs higher penalties (interest rate differential). | Greater flexibility; lower penalties for breaking the mortgage early (usually three months’ interest); usually able to switch to a fixed-rate without penalty | Flexible but requires careful planning due to fluctuating payment amounts and potential financial strain. |
| Best For | Borrowers prioritizing stability and predictability, especially first-time home buyers or those on tight budgets. | Borrowers willing to take on some risk for potential savings when rates are low or stable. | Borrowers confident in managing fluctuating payments and seeking potential savings during low-rate environments. |
**Currently Fixed rate mortgages are at a lower % rate than variable rate mortgages.
*Stress Test* All borrowers must qualify under a stress test at a higher interest rate (currently 5.25% or the contract rate + 2%) to ensure they can handle potential increases in payments.
Summary:
Fixed-Rate Mortgage (FRM)
Pros: Predictable payments; easy budgeting; no risk from interest rate increases.
Cons: Higher initial rates; less flexibility; higher penalties for breaking terms.
Variable-Rate Mortgage (VRM)
Pros: Lower starting interest rates; potential savings if rates drop; stable payments during term.
Cons: Rising rates increase total interest cost; amortization period may extend.
Adjustable-Rate Mortgage (ARM)
Pros: Lower initial costs due to teaser rates; consistent amortization schedule.
Cons: Payments fluctuate with rates; teaser rates can be misleading; higher risk of payment shock when teaser period ends.
Teaser Rates in ARMs
Teaser rates are introductory low-interest periods designed to attract borrowers, often lasting 6–12 months or during the fixed portion of an ARM loan. While they reduce upfront costs, borrowers must carefully evaluate the post-teaser rate structure to avoid unexpected payment increases
Conclusion
The choice between these mortgage types depends on individual financial goals, risk tolerance, and market conditions:
- Choose a Fixed-Rate Mortgage for stability.
- Opt for Variable-Rate Mortgage if you’re comfortable with moderate risk and want **lower starting costs.
- Consider Adjustable-Rate Mortgage if you’re willing to accept payment variability in exchange for potentially lower initial payments or teaser benefits.
When deciding between these options, consider your financial stability, risk tolerance, and long-term goals and don’t hesitate to contact us to help you to determine the best fit for your circumstances.
