Fixed Rate Mortgage:

A fixed-rate mortgage is a home loan with a fixed interest rate for the entire term of the loan.

Locks your rate into place for a period of time called the term (usually 5 years).

Rate is typically a bit higher, but provides for a stable, consistent mortgage payment for the entirety of your term.

If you break the mortgage, there is often a bigger penalty called an Interest Rate Differential Penalty. (Could be in the tens of thousands of dollars).

It is not possible to switch a fixed rate into a variable rate without breaking the mortgage.

 

Variable Rate Mortgage:

With a variable-rate mortgage, your mortgage payment will stay the same throughout your mortgage term, but the interest rate can go up and down along with the prime interest rate.

The rate floats or changes over time, with decisions from the Bank of Canada.

The rate is determined using a discount off of the Prime Rate (ex. Prime minus .50%).

Typically, the variable rate is lower than fixed, but can also float higher for periods. 

If you break the mortgage, the penalty is typically far lower.

You can lock the variable rate into a fixed rate at any time, without breaking the mortgage.

 

Open Mortgage:

An open mortgage is one with flexible options to increase your mortgage repayments, either by increasing your regular payments or via a lump sum.

 

Closed Mortgage:

A closed mortgage will penalize you for paying off all or part of your mortgage early.

 

Variable or fixed mortgage in 2022? Which is right for you?

6 Reasons why a variable rate could lead to more savings now, and potential future:

Historical, long term evidence of variable rate cost savings

Effects of COVID and Why the variable rate should not increase by as much as some expect, or as fast

A note on current high inflation, and historical perspective on rate movements 

How to minimize the risk associated with a variable rate mortgage

How variable rates offer more flexibility and lower penalties than fixed rates

How to time a fixed rate lock in 

 

Variable Mortgage Rates Canada Prediction:

Effects of COVID (and why the variable rate is not likely to increase too much, too quickly).

As the effects of COVID continue to take their toll on the broader Canadian and global economy, it is likely that, as of 2022, it will take several years for the economy to more formally stabilize and grow. 

One of the biggest mechanisms that the government has to stimulate an economy is its control over interest rates through the Central Bank of Canada. 

If interest rates are kept low – this lowers costs of borrowing which does two main things: 

It reduces what borrowers need to spend on interest, so borrowers have more money to spend on other things in the economy.

It makes borrowing more attractive, so people borrow more, and spend more with this borrowed money – and this boosts the economy.

My main variable mortgage rate prediction here is that the Government of Canada will want to keep interest rates relatively low for a long period of time because the economy needs continued stimulation, given the effects of coronavirus. The Central Bank of Canada will not likely increase rates too much, or too quickly until they are more certain that the economy is on track for sustainable long-term growth, post covid. 

Inflationary effects on mortgage rates Most are aware that inflation has gripped the world and Canada more specifically, in large part by crippling supply chains and limiting products available to customers. Naturally, a limited supply and excess demand will lead to higher prices – or inflationary pricing.

Again, the main tool the central banks have to combat inflation is their ‘central bank rate’.  As noted above, by increasing this rate, consumers can not afford to borrow and purchase as much (or are at least dis-incentivized to borrow/purchase), and business do not borrow as much to purchase with either. This has the effect of reducing demand, slowing the economy, and in turn, reducing inflation.