Fixed vs. Variable Mortgage Rates: A Simple Guide for First-Time Homebuyers

February 23, 2025

Interest rates can be one of the trickiest parts of buying a home, especially if you’re doing it for the first time. Terms like fixed rate, variable rate, prime rate, and amortization swirl together, and suddenly the excitement of home shopping comes with a side of confusion.

The good news? With the right information, choosing the best interest rate type for your situation becomes much more straightforward. Consider this your crash course in mortgage rates: what they are, how they work, and how to choose the option that makes the most sense for you. Let’s go!

Why do mortgages have interest?

For most people nowadays, buying a house outright isn’t that common. That’s where mortgages come in. Banks, credit unions, and other lenders provide loans to those looking to buy a home, and interest is essentially the fee you’re charged for borrowing and for providing their services. Think of it as their way of protecting the value of the funds they provide and compensating for the risk of lending.

How is mortgage interest calculated?

Mortgage interest is typically calculated based on three things:

Mortgage Balance

Interest Rate

Payment Frequency

In Canada, most fixed-rate mortgages use semi-annual compounding, that just means interest is calculated and added to the principal balance every six months. The interest on your mortgage is charged based on your payment schedule, though — usually monthly, biweekly, or weekly.

Here’s a simplified look at how it works:

1. Each payment has two parts:
   • Principal: the amount that pays down your loan
   • Interest: the cost of borrowing the money

   At the start of your mortgage, a larger portion of each payment goes toward interest. Over time, as your principal balance shrinks, more of your payment goes toward the principal.

2. The interest rate determines the cost of borrowing.

A higher rate means higher interest costs over time. A lower rate means more of your payment goes toward paying down the actual mortgage. That’s why negotiating and finding the best rate can really pay off in the long run.

3. Your payment frequency affects how quickly you pay off the mortgage.

If paying off your mortgage is a priority, accelerated payments are the way to go. They can reduce interest significantly because you are reducing the principal more often.

The important thing to remember is this: your interest rate directly impacts both your monthly payments and the total amount you’ll pay over the life of the mortgage.

What is a variable (or adjustable) mortgage rate?

A variable mortgage rate is a rate that can change during your mortgage term, depending on changes in the lender’s prime rate, which is influenced by the Bank of Canada’s policy decisions.

There are two main types:

Variable Rate with Fixed Payments Your payment stays the same, but the portion going toward interest vs. principal shifts. If rates rise → more of your payment goes to interest. If rates fall → more goes to principal.

Adjustable Rate Mortgage (ARM) Your payment stays the same, but the portion going toward interest vs. principal shifts. Rates rise → your payment goes up. Rates fall → your payment goes down.

With a variable rate and fixed payments, things may be easier to manage since the amount you’re paying stays the same. But if rates increase, and more of your payment goes towards interest, then it will take longer for you to pay off your mortgage, potentially increasing the amortization, or length, of your mortgage.

At MERIX, we offer adjustable rate mortgages. You can learn more about them here.

Benefits of a variable rate

• Often starts lower than a fixed rate
• Can save you money if rates drop over time
• Historically, variable rates have saved borrowers interest on average (though past performance doesn’t guarantee future results)

Things to consider:

• Payments or amortization can increase if rates rise
• Requires comfort with uncertainty or fluctuations
• Not ideal for tight budgets or risk-averse borrowers

A variable rate works best for homeowners who want flexibility, can handle potential payment changes, or believe interest rates may decline.

What is a fixed mortgage rate?

A fixed mortgage rate stays the same for your entire mortgage term, typically 1 to 5 years (though longer terms exist). No matter how the market moves, your rate — and your payment — doesn’t change for that period.

Benefits of a fixed rate

• Predictable monthly payments.
• Protection from rising interest rates.
• Easier budgeting and long-term planning.

Things to consider:

• Fixed rates often start higher than variable rates.
• Breaking a fixed-rate mortgage early can come with higher penalties.
• If market rates fall, you won’t benefit without refinancing or switching at renewal.

A fixed rate is ideal for anyone who values stability, has a strict budget, or prefers peace of mind knowing their payments won’t change.

Still wondering which rate you should go for? Answer the questions below to find out whether a fixed rate or variable rate might be a better fit for your situation.

1. How important is payment predictability to you?

1. Very important — I want payments to stay the same.
2. I’m okay if payments change a bit over time.

2. How flexible is your monthly budget?

1. I need payments to stay stable.
2. I can handle increases if rates rise.

3. How long do you plan to stay in your home or keep this mortgage?

1. Several years — I want long-term consistency.
2. Not long — I may move, refinance, or switch soon.

4. How do rising interest rates make you feel?

1. Stressed — I’d rather lock in a rate and relax
2. Not too worried — I know rates move up and down.

5. How do you feel about taking on some financial risk for potential savings?

1. I prefer to avoid risk, even if it means paying a bit more.
2. I’m comfortable with some risk if it could save me money.

Your Results

Mostly A’s → You may prefer a fixed rate
You value stability, predictable payments, and long-term certainty.
A fixed rate gives you peace of mind, protects you from rising interest rates, and makes budgeting simple. It’s a great option if you plan to stay in your home for a while or want consistent monthly payments.

Mostly B's → You may prefer a variable rate
You’re comfortable with payment changes and open to the possibility of saving money if rates go down.
A variable rate can be a smart choice if you have financial flexibility, don’t mind some uncertainty, or expect to refinance or move within a shorter timeframe.

Find the rate that feels right for you

Understanding interest rates is an important step toward homeownership confidence. Whether you choose fixed or variable, the right option is the one that fits your lifestyle, budget, and comfort level with change.

A mortgage professional can also walk you through scenarios, run comparisons, and help you visualize how each rate type affects your payments over time. The more informed you are, the easier it becomes to choose the rate that feels “just right” for your homebuying journey. Connect with a mortgage broker near you today to start exploring your mortgage rate options!