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Choosing the right mortgage is one of the biggest financial decisions you'll make—especially when it comes to the type of interest rate you pick.

You’ve probably heard of fixed-rate and variable-rate mortgages. Some lenders also offer a third option called an adjustable-rate mortgage, or ARM.

Each one comes with its own pros, cons, and risks. And the one that’s best for your neighbour might not be the best for you.

In this article, we’ll explain—in simple terms:

What each of these mortgage types means

How the payments and risks differ

When one might make more sense than the others

What Is a Fixed-Rate Mortgage?

With a fixed-rate mortgage, your interest rate stays the same for the entire term of your loan—whether that’s 1 year, 3 years, 5 years, or even longer.

That means:

Your monthly payment never changes

Your budgeting is easier

You’re protected from rising interest rates

Example:

You lock in a 5-year fixed mortgage at 5.19%. For the next five years, your rate and your mortgage payment won’t change—no matter what happens in the economy.

This is the most popular mortgage type in Canada, especially during uncertain times when people want predictability.

What Is a Variable-Rate Mortgage?

With a variable-rate mortgage, your interest rate can go up or down during your term—depending on changes to your lender’s prime rate, which usually follows the Bank of Canada’s policy rate.

But here’s the twist:

Even if the rate changes, your monthly payment usually stays the same. What changes is how much of your payment goes toward interest vs. principal.

When rates go down, more of your payment goes toward paying off the loan faster.

When rates go up, more of your payment covers interest—and less goes toward the loan itself.

Example:

Let’s say your lender gives you a variable rate of prime minus 1%, and their current prime rate is 6.95%. That means your rate is 5.95% today. If the Bank of Canada lowers rates and the prime drops to 6.45%, your new rate becomes 5.45%.

But your monthly payment might still stay the same. Your lender just shifts the way your money is applied within the payment.

What Is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage is like a cousin to the variable-rate mortgage—but with one key difference:

When the interest rate changes, your monthly payment changes too.

So:

If rates go down, your payment goes down.

If rates go up, your payment goes up.

Adjustable-rate mortgages are less common in Canada than in the U.S., but some Canadian lenders do offer them.

They’re usually best for people who can handle payment changes and want to take full advantage of falling interest rates.

Pros and Cons of Each Mortgage Rate Type

Pros of Fixed-Rate Mortgages

Stability – You know exactly what you’ll pay each month.

Good for budgeting – Great for families or people with fixed incomes.

Rate protection – You’re protected if interest rates rise during your term.

Peace of mind – No surprises.

Cons of Fixed-Rate Mortgages

Usually higher initial rates – You may pay more at the start compared to variable or adjustable.

Less flexibility – If rates go down, you’re stuck unless you refinance (which often involves a penalty).

Bigger penalties to break early – Fixed mortgages often come with hefty prepayment charges if you end the term early.

Pros of Variable-Rate Mortgages

Lower starting rates – Often cheaper than fixed-rate loans up front.

Potential to pay off faster – If rates drop, more of your money goes toward the loan balance.

Easier to break – Variable-rate mortgages usually have smaller penalties (3 months’ interest) if you need to refinance or sell.

Cons of Variable-Rate Mortgages

Uncertainty – You don’t know what your actual interest cost will be over time.

Payment risk – If rates rise too much, you could hit something called a “trigger rate”—where your payment doesn’t cover the interest anymore, and the lender increases your payment or converts the loan.

Not ideal for risk-averse borrowers – If payment stability matters to you, variable may not be the right choice.

Pros of Adjustable-Rate Mortgages

Full benefit from rate drops – Your payment actually decreases when rates go down, giving you more monthly breathing room.

Transparent structure – Your payment always reflects the current rate, so you see the effects immediately.

Cons of Adjustable-Rate Mortgages

Higher payment risk – If rates rise, your payments rise right away.

Harder to budget – Payments can change every few months depending on the economy.

More mental stress – It’s harder to plan long-term when your costs keep changing.

Which Rate Type Is Better?

That depends on your financial situation, your tolerance for risk, and your plans for the future.

Here are a few general guidelines:

If you want peace of mind and predictability, go fixed.

If you can handle some rate risk and want to save up front, variable might be better.

If you’re comfortable with payment swings and want to benefit from falling rates, adjustable could make sense.

But don’t decide based on just today’s rate. Think about where you are financially, and what might change in your life over the next 3–5 years.

3 Real-Life Scenarios

Let’s look at a few real-world examples to see which mortgage type might be a better fit based on lifestyle, income, and comfort with risk.

Scenario 1: Steady Income, Likes Predictability

Name: Amanda

Job: Teacher with a fixed salary

Goal: Buy a family home and stay long term

Amanda chooses a fixed-rate mortgage. She wants to know exactly what her monthly payment will be, so she can plan her budget and focus on her kids. She’s willing to pay a little more for the stability.

Scenario 2: Flexible Income, Plans to Move

Name: Jason

Job: Self-employed graphic designer

Goal: Buy a condo now, sell and upgrade in 3 years

Jason chooses a variable-rate mortgage. He’s comfortable with some rate movement, especially since he’ll likely sell before the term is up. He also knows the penalty to break his mortgage early will be lower if he chooses a variable rate.

Scenario 3: Analytical Investor, Not Risk-Averse

Name: Priya

Job: Financial analyst

Goal: Buy a rental property and maximize cash flow

Priya chooses an adjustable-rate mortgage (ARM). She monitors interest rate trends closely and wants her payments to reflect current rates. If rates go down, she benefits right away and can redirect the savings into her investment portfolio.