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Fixed vs. variable rate mortgages

Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

There are two common ways mortgages are structured — and for your purposes, “structured” simply refers to how much you have to pay a month, and over how many months. There are fixed rate mortgages and variable rate mortgages (which you’ll often hear referred to by their aliases — adjustable rate mortgages or just VRMs.)

A fixed rate mortgage is pretty straightforward. A bank quotes you an annual percentage rate and term — say 4% for 5 years on a $300,000 loan, amortized over the course of 25 years — and you agree to pay a specific amount every month so that at the end of the term you will have paid off the principal sum you borrowed, the interest you owe to the bank, as well as any associated expenses which will have been added all together then divided into equal monthly payments. Fixed rate mortgages move in lockstep with the government of Canada’s bond yields, or the interest rate the government pays to borrow money through bond sales.

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Variable rate mortgages are a bit trickier. Like fixed rate mortgages, they too have a fixed term, but their interest rates change regularly — as often as every month, based on any movement of the prime or overnight rate, the government-set rate that serves as the primary catalyst for interest rates moving up or down. Though many studies have shown that those who accept the inherent risk of a floating interest rate of VRMs have saved money in the long term, it’s by no means guaranteed, and this rationale for choosing a VRM is now much debated. VRMs can be designed two ways, either with fixed payments or fluctuating payments. If you choose to pay the same amount every month for the term of the mortgage, how much of your payment goes towards the principal and how much goes towards interest will depend on whatever the interest rate happens to be that month. If you choose a VRM with a fluctuating payment, your monthly mortgage payment could vary wildly from month to month.

Those who have any psychological need for financial consistency will find themselves more comfortable with a fixed rate mortgage; those who feel comfortable with a little more uncertainty might find VRMs more appealing.

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Last Updated November 7, 2018

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