The question of the ages regarding mortgages never changes. Are you losing hair just thinking about your mortgage? Do your friends have a variable or fixed rate? Are you missing out on knowing what is best for you? Do you even know the difference? Don't worry, Odyssey has got you covered.

What is a variable rate?

A variable rate is a rate that is based on the "Prime rate". The prime rate, in simple terms, means the annual interest rate Canada's major banks and financial institutions use to set interest rates. The word "variable" is self-explanatory, "vari-able", an easy way to remember the meaning is "varies". Variable rate is a rate that may vary based on the prime rate, or the rate that the major banks use to set interest rates.

Now, if you have a variable rate, your rate will fluctuate based on what the prime rate is. For example:

TD Canada Trust prime rate is 7%.

Your rate is Prime (7%) minus 0.75. That would give you a 6.25% interest rate.

If prime decreases to 5%, you will have…? 4.25% interest rate.

If prime decreases to 2%, you will have…? 1.25% interest rate.

WARNING. If prime rate increases, your rate will also increase. Some banks and financial institutions will not notify you of your rate change and it may take effect immediately.

The current Canadian housing market has been hectic. The monthly payment of those who had a variable rate since the all-time low in 2021 has more than doubled up until today's market. The variable rate can be sweet but also bitter.

What is a fixed rate?

A fixed rate is a rate that the banks and financial institutions offer that remains the same during your term. If you were offered a rate of 3% on a 5-year term, your rate will stay at 3% for the 5 years. A fixed rate provides people with the peace of mind that their payments will remain the same for the whole term. The rate may not be the same after your term is over. It might have decreased or increased.

Is the variable rate for you?

If you are comfortable with the potential risk of your payments fluctuating from time to time, the variable rate may be for you. Those who choose the variable rate tend to save on interest, in a low-rate environment, and even throughout the lifetime of their mortgage, according to many mortgage experts.

Now you know in simple terms the difference between Variable and Fixed rates. Happy Mortgage Hunting!