What you need to know about fixed and variable mortgage rates

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Fixed rate or variable rate: the best for your mortgage

You’ve finally decided to take out a mortgage to buy your property. However, you’re faced with a thorny dilemma: fixed or variable rate? In our article, we’ll explain what you need to know about each of these options. So you can decide which is best for your mortgage.

What is a fixed-rate mortgage?

A fixed-rate mortgage is a mortgage that maintains a fixed interest rate for the duration of the mortgage contract. In other words, the interest rate on your loan will not vary throughout the repayment period. This is a guarantee of security and peace of mind.

In fact, the invariability of the rate, together with the monthly repayment, gives the borrower the possibility of estimating the total cost of credit. So, there’s (almost) no room for unforeseen circumstances (rate hikes, for example).

The immutability of the fixed rate lends a very reassuring nature to this type of loan. To top it all off, there are few disadvantages.

How does a fixed-rate mortgage work?

Borrowers – and even banks – prefer fixed-rate mortgages because of their stability. This rate is often set when the contract is signed and is not subject to any subsequent changes. Be aware, however, that early repayment of a fixed-rate mortgage entails payment of a substantial penalty.

The fact that it is impossible to predict long-term market trends is what makes fixed-rate loans so reassuring. It’s worth noting that before offering a fixed-rate loan, the banks set the rate in strict compliance with the maximum usury rate. This determination is based on criteria such as:

the fixed-rate loan term: the loan period, which can vary from 5 to 35 years.
Indice des Obligations Assimilable du Trésor: fixed rates spread over an average of 10 years.
the amount of the borrower’s contribution: a personal contribution of around 10% to 20% of the cost of the project is required.
the borrower’s profile: the fixed rate also depends on the borrower’s age, profession and income.
the geographical location of the property: some banks offer different types of fixed rate depending on the area in which the property is acquired.

What is a variable-rate mortgage?

A variable-rate mortgage, unlike a fixed-rate mortgage, is a type of mortgage with a fluctuating term. This means that your rate will rise with every increase in the prime rate, and vice versa. In other words, your rate will rise with every increase in the key interest rate, and vice versa.

The variable rate is best suited to those with a flexible budget who can cope with market fluctuations. It can also be very interesting for borrowers wishing to save money over the long term. However, you need to have a certain tolerance for risk if you decide to opt for this type of mortgage.

How does a variable-rate mortgage work?

The rate on a variable-rate mortgage is revised periodically in line with changes in the reference index. It is also revised annually, on the same date as the variable-rate loan contract is signed.

In addition, banks often apply the reference index plus a margin ranging from 1% to 3%. The margin applied by banks depends on the number of guarantees offered (stable employment, income, savings capacity, etc.). In short, the greater the number of guarantees, the lower the margin, so that you can benefit from a better rate.

Comparative table of fixed and variable rates

To better understand the strengths and weaknesses of a fixed-rate loan and a variable-rate loan, all the relevant information has been compiled in a table.

Mortgage

Benefits

Disadvantages

Fixed-rate mortgage

Fixed repayment terms and stable interest rates
Protection against rising interest rates
Fixed instalment for the entire credit period
Simple and easy to understand

When a fixed-rate mortgage and a variable-rate mortgage are offered, the rate of the fixed-rate mortgage is often much higher than that of the variable-rate mortgage.
It will not be possible to take advantage of falling market rates if they occur.
Unlike variable-rate loans, heavy penalties apply in the event of early repayment (unless negotiated in advance).

Variable-rate mortgage

A lower starting rate than with a fixed-rate loan
Certain financial benefits when interest rates fall.
No prepayment penalties. And even if penalties must be paid, they’re much lower than those payable on a fixed-rate loan.
The possibility of switching to a fixed rate (provided the contract includes this option)
the option of shortening or lengthening the repayment period

When the interest rate fluctuates upwards, this means higher monthly payments. So, there’s a risk of finding yourself, at some point, in a complicated financial situation.
The absence of an amortization schedule. This has a significant impact on the borrower’s long-term projects.

What is a blended rate?

The mixed-rate loan combines the characteristics of a fixed-rate loan and a variable-rate loan. Tailor-made by banks, the blended-rate loan combines and alternates the two classic types of loan.

However, a mixed-rate mortgage is not for everyone. Already not offered by all banks, it is especially recommended for people with (very) good credit records. It is generally offered based on criteria such as: borrowing capacity, loan term, creditworthiness, etc.

Mixed-rate loans are generally repaid over two periods:

an initial repayment period at a fixed rate. This period often lasts from 3 to 10 years. Often, the fixed rate used during this phase is more advantageous than the traditional fixed rate.
a second repayment period, during which the rate becomes variable. During this period, the rate will vary according to the key rate and market fluctuations.

It should also be noted that during the second phase, the borrower can negotiate a return to a fixed rate. However, this fixed rate will be significantly higher than a traditional fixed rate.

In any case, the best way to decide on the type of mortgage you need is to be accompanied by professional brokers.

FAQ

Why is the variable rate rising?

Variable-rate mortgages generally fluctuate according to market conditions and the Bank of Canada's key interest rate. This means that if the market shows an upward trend, the variable-rate mortgage rate will also rise.

When and how do you switch from a variable rate to a fixed rate?

It is, of course, possible to switch from a variable rate to a fixed rate. Borrowers wishing to make this conversion can do so on the anniversary date of their contract, i.e., once a year during the life of their mortgage.

To do this, it is important to notify your bank in writing of your wish to convert. Submitting a letter is very important, as it formalizes your request and serves as proof in the event of any difficulties.

If you wish to make this change, here is a sample letter:

Full name

Address

Postcode, town

Telephone number

In (name of town), on (date)

Subject: Request to change from variable to fixed interest rate

Dear Sir/Madam

I have taken out a mortgage with your bank on (date of contract). The number of this contract, for an amount of (amount of the loan), is XXXX. It is granted for a repayment period of X years at a variable rate of X%. In the contract, it is stipulated that this interest rate is variable, but with the possibility of conversion to a fixed rate. I would therefore like to revise this rate so that it is fixed for the entire remaining term of the loan. I'd like to set up a meeting with you to discuss the matter more calmly and in person.

Thank you in advance. Yours sincerely

Please sign.

Can you freeze a variable rate?

It is possible to freeze a variable rate. Doing so enables the borrower to secure an interest rate for a specific period. This may be when applying for a mortgage or refinancing.

Freezing your variable mortgage rate allows you to benefit from the best available mortgage rate (in the event of an increase in market interest rates).