What Is a Fixed-Rate Mortgage?
Fixed-rate mortgages offer consistent monthly payments but carry the risk of high pre-payment penalties.
When you’re shopping for a mortgage, one decision you’ll make is which type of mortgage to get.
The most common home loans in Canada are fixed-rate mortgages.
What is a fixed-rate mortgage?
A fixed-rate mortgage is a loan with an interest rate that is set for the duration of the mortgage term.
Interest rates might rise or fall after you’ve finalized your mortgage, but the interest rate you pay remains unchanged until your mortgage term ends.
In Canada, fixed-rate mortgages are the most utilized type of mortgage; about $1 trillion of the $1.4 trillion in outstanding mortgage balances were attributable to fixed-rate mortgages in December 2023. Variable-rate mortgages accounted for the other $400 billion.
Who are fixed-rate mortgages best for?
Fixed-rate mortgages are generally a good option in two scenarios.
First, they can be a fit for anyone who wants a predictable monthly payment. Once you sign a fixed-rate mortgage, you know what your payment will be for the next several years.
Second, a fixed-rate mortgage can be a wise choice for people who are relatively certain they'll be staying in their home for the duration of their mortgage term. Breaking a fixed-rate mortgage ahead of schedule can be very expensive because they often have the highest pre-payment penalties of any mortgage type.
» MORE: Learn about the differences between fixed and variable mortgages.
When is a variable-rate mortgage better?
Historically, variable-rate mortgage rates have been lower than fixed rates. Many home buyers opt for variable rates for this reason.
A variable-rate mortgage is generally the better choice if you don't think you'll stay in your home for the entire mortgage term. Breaking a variable-rate mortgage usually triggers a smaller pre-payment penalty compared to breaking a fixed-rate mortgage.
Fixed mortgage rates
Lenders consider many factors when offering a rate to a mortgage applicant. Some of these factors are specific to you and your finances while other factors reflect larger macroeconomic trends, which are out of your control.
Getting a lower fixed mortgage rate
Your credit score is a major factor in the fixed rate you receive. Traditional lenders typically look for a score above 680. B lenders often consider applicants with credit scores below 680. Applicants with a score around 800 or above are likely to see some of the best rates currently available.
Other factors that can affect the fixed rate lenders offer include:
The length of your mortgage.
Your income.
Your down payment amount.
How market forces affect fixed-rate mortgages
Government bond yields determine fixed mortgage rates in Canada. If bond yields go up, mortgage rates tend to go up, too. If they fall, mortgage rates tend to fall.
Mortgage lenders don’t change rates at the same speed bond yields move, but bonds are a good proxy for mortgage rate trends in the long term.
Fixed-rate mortgages: Recent trends
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Kurt Woock
