What is the difference between a fixed rate mortgage and a variable rate mortgage?

Author: Gary Corriveau

In a fixed-rate mortgage, the interest rate is pre-determined at the beginning of the mortgage term. The advantage of this type of mortgage is that it offers the security of knowing your monthly payments beforehand and allows you to plan accordingly.

In a variable or floating rate mortgage, the payments can be fixed or variable depending on the lender however, the interest rate can fluctuate depending on the market conditions. If the interest rates drop, more of the payment goes towards reducing the principal; if the rates go up, a larger portion of the monthly payment goes towards covering the interest. The interest rate is based on a predetermined formula which is in-turn based on the prime lending rate.