The answer to this question depends on your preference—stable payments, or risk with the potential for savings.
The way a fixed-rate mortgage works is as follows: the bank gives you an annual interest rate for a fixed period of time (say five years) on a $400,000 loan amortized over 30 years. Ratehub.com reports that a rate of 3.24 per cent is the lowest available option for a five-year term offered by mortgage banks in Canada, as of April 2018.
In this case, you agree to pay a certain amount every month, so at the end of the agreed upon term, you will have paid off the amount borrowed along with the interest and any other expenses that have been divided up into monthly payments. These mortgages move in tandem with the interest rate the government of Canada is charged to borrow money through bond sales.
While variable-rate mortgages (VRM) also have a fixed term, their interest rates change as often as monthly, depending on the government-set prime rate, which moves rates up and down regularly. A VRM can have either fixed or fluctuating payments depending on your preference.
With fixed payments, the amount you put down on the principal and on the interest will depend on what the interest rate is for that month. If you opt for fluctuating, the amount you pay each month will be constantly changing to match the current interest rate.
Which is right for you?
If consistency is your main concern and you’re a first-time buyer unwilling to take much risk, a fixed term rate might be a safer choice. If you’re open to paying a different amount each month, you might prefer a variable rate, as studies have shown that the risk of a VRM tends to pay off with a lower overall interest payment in the end.
A VRM also allows a little more flexibly should you need to break your loan before the term is up. Often, people will go into the mortgage process with no intention of breaking their loan within the five-year period, but things like divorce, unexpected debt issues and having to move to a different city can create a situation where one might have to make this decision.