When applying for a mortgage, you will have multiple types to choose from. The two most common types of mortgages are variables-rate mortgages and fixed-rate mortgages. The type you choose will vary based on your income and risk tolerence level.

Variable mortgage rates

These are mortgages that have interest rates that are adjusted from time-to-time to reflect market conditions, typically yield a lower interest rate than fixed-mortgage rates, which is why many people lean towards this type of mortgage.

The primary concern with variable mortgage rates, however, is the risk involved – interest rates can increase or decrease without warning, which can put your finances in chaos. When assessing whether or not you should go with a variable rate mortgage, you should look at your current earnings, as well as your earning potential for the next few years. Many first-time homeowners in Canada have significant portions of their income allocated towards buying a home, so the possibility for varying rates is worrisome. Although this may sound like a frightening concept, knowing the risk involved with variable rate mortgages is a prerequisite for fully understanding this type of financing!

In addition to earning and potential earning, doing some "soul searching" in terms of your personality is a must when considering a variable rate mortgage. Are you the type of person who likes everything to stay consistent? Does the thought of your interest rate increasing – or even decreasing – cause you unnecessary anxiety? If so, you may want to consider a fixed-mortgage rate, which stays consistent from month-to-month. Despite these potential drawbacks or anxieties, many people lean towards variable mortgages because rates are based on prime rates, and are typically lower than the traditional “fixed rate.” As a homeowner, your “amortization period” (how long you’ve selected to repay the mortgage) can become longer, or shorter, depending on market conditions.

Fixed-rate mortgages

These types of mortgages appeal to some people because they allow you to allocate X amount of dollars every month, and lead to more consistent budgeting. You know exactly how long you will be paying for, and how long it will take for your mortgage to be paid off in full.

For quite some time now, five-year fixed products have been popular in Canada. Because of the fluctuating interest rates, fixed-rate products are a no-brainer for homeowners both new and seasoned alike. As mentioned before, many new families and first-time homeowners tend to lean towards fixed-rate because this allows for more precise budgeting. It is important to note, however, that the standard penalty to pay out a fixed-rate is three months' interest (or the interest rate differential, whichever is greater.)

There are also two types of fixed-rate mortgages – open and closed. In an open fixed-rate, you can pay any additional amount towards your sum without any prepayment charge. Although some may view variable rate mortgages as too risky or open-ended, this type of fixed-rate still allows for some customization. Closed fixed-rate works slightly different; interest rates and payments are fixed for the term you end up choosing. Although this option allows for less flexibility on the homeowner’s part, this situation is ideal for those who would like to stay budget-conscious. It is also important to note that closed fixed-rate mortgages also require lower interest rates than open mortgages. As with most home-owning decisions, the answer to your fixed versus variable mortgage question is up to you!

Contract renewal

Also known as mortgage renewal is when your current term comes to a close, and you need to sign a new term. (Or pay off your mortgage and celebrate!) During this time, which is usually every five years (as five-year contracts remain very popular in Canada,) you negotiate terms of your contract including length, interest rate, and in some cases, lender. This process can be nerve-wracking for new homeowners, so it's important to sit down with someone who has your best interests at heart, and wants you to get the best "bang for your buck." Although some may view the re-negotiation process as tedious, many goods can come from it, including re-adjusting your mortgage to better align with your current financial needs.

Current 5-year fixed mortgage rates in Toronto
CanWise Financial: 3.19%
Bank of Montreal: 3.29%
TD Bank: 3.34%
Scotiabank: 3.74%
(Rates based on a $500,000 home price with a 15% down payment)

Current 5-year variable mortgage rates in Toronto
CanWise Financial: 2.21%
TD Bank: 2.45%
Bank of Montreal: 2.45%
HSBC: 2.39%
(Rates based on a $500,000 home price with a 15% down payment)

As seen by the above, 5-year variable rates tend to be lower than 5-year fixed rates. For more information on current mortgage rates, please visit Ratehub.