Overview of Mortgage Types
When you take out a mortgage, you choose how the interest rate on your loan is structured. In Canada, the two primary categories are fixed-rate mortgages and variable-rate mortgages. Each affects your monthly payments, financial risk, and long-term costs differently.
Fixed-rate mortgages lock in an interest rate for a set term, so your monthly principal and interest payments remain the same throughout that period. Variable-rate mortgages (often called adjustable-rate in the U.S.) have an interest rate that can change based on market conditions, which means your payment amount or the interest portion of your payment may fluctuate.
Within these categories, you also encounter open and closed mortgages, which differ in prepayment flexibility. Understanding these options helps you evaluate which product fits your financial situation and goals.
Sources: Consumer Financial Protection Bureau, Mortgage Calculator
Comparison Criteria: Rate Type, Term, Prepayment
To compare mortgages effectively, focus on three key criteria: rate type, term length, and prepayment flexibility.
Rate type determines whether your interest rate stays fixed or changes. Term length is the period your mortgage contract is in effect, typically ranging from six months to ten years. Prepayment flexibility refers to your ability to make extra payments, pay off the mortgage early, or break the contract without penalty.
The table below summarizes how fixed and variable rate mortgages compare on these criteria, using TD Canada Trust's product structures as a reference.
| Criterion | Fixed-Rate Mortgage | Variable-Rate Mortgage |
|---|---|---|
| Rate stability | Rate does not change | Rate can increase or decrease based on market changes |
| Payment stability | Monthly principal and interest payments stay the same | At TD, payment amount stays the same, but the interest portion may change if the prime rate changes |
| Initial rate level | Typically higher interest rate | Typically lower interest rate to start |
| Available terms (TD) | 6 months, 1, 2, 3, 4, 5, 6, 7, or 10 years | 5 years |
| Prepayment charge (closed) | Greater of 3 months' interest or interest rate differential (IRD) | 3 months' interest |
Sources: Consumer Financial Protection Bureau, TD Canada Trust
Fixed-Rate Mortgages: Pros and Cons
A fixed-rate mortgage offers predictability. Your interest rate and monthly principal and interest payment remain constant for the term of the loan, which makes budgeting easier. This stability is attractive to many buyers—in the U.S., 85 to 95% of buyers chose fixed-rate mortgages between 2008 and 2022.
The trade-off is that fixed-rate mortgages typically come with a higher interest rate compared to variable-rate mortgages. Also, if you need to break a closed fixed-rate mortgage before the term ends, you may face a prepayment charge that is the greater of three months' interest or the interest rate differential (IRD). This can be a significant cost for early termination.
Fixed-rate mortgages are available in a range of terms—TD, for example, offers terms from six months to ten years—so you can select the length that matches how long you plan to keep the mortgage.
- Pros: Stable monthly payments simplify budgeting.
- Pros: Protects you from interest rate increases during the term.
- Cons: Typically higher interest rate than a variable-rate mortgage.
- Cons: Prepayment charges can be substantial for early payout on closed mortgages.
Sources: Consumer Financial Protection Bureau, TD Canada Trust
Variable-Rate Mortgages: Pros and Cons
Variable-rate mortgages (adjustable-rate in the U.S.) typically start with a lower interest rate, which can result in lower initial payments. The rate can change over time based on market conditions, meaning your interest costs may rise or fall.
At TD, variable-rate mortgages have a fixed term of five years. The payment amount remains the same, but if the prime rate rises, a larger portion of your payment goes toward interest, and you pay down the principal more slowly. Conversely, if rates fall, more of your payment goes to principal.
The main advantage is the potential to save money in a falling rate environment. The risk is that rates may increase, causing you to pay more interest over time or, in some products, face higher payments.
For closed variable-rate mortgages at TD, the prepayment charge is three months' interest, which is simpler and often less than the charge for a fixed-rate mortgage.
- Pros: Lower initial interest rate compared to fixed-rate mortgages.
- Pros: Potential savings if interest rates remain stable or decrease.
- Cons: Payments may change if your product structure allows adjustments.
- Cons: Exposed to interest rate increases, which can increase your borrowing costs.
Sources: Consumer Financial Protection Bureau, TD Canada Trust
Term Length Comparison (1-5 years)
Term length is the period your mortgage contract with the lender remains in effect. It affects your interest rate, payment stability, and the timing of renewal negotiations.
Shorter terms, such as one or two years, often come with lower interest rates but require more frequent renewals. Longer terms, like five years, offer more extended payment stability but may come with a slightly higher rate.
TD offers variable-rate mortgages with a five-year term only. Fixed-rate mortgages are available in a wider range: six months, 1, 2, 3, 4, 5, 6, 7, or 10 years. This variety allows you to match the term to your expected length of ownership and your comfort with contract renewals.
Sources: TD Canada Trust
Open and Closed Mortgages: Key Differences and Trade-offs
In addition to fixed or variable rates, mortgages are categorized as open or closed based on your ability to pay off the loan early.
An open mortgage offers high flexibility: you can pay off the mortgage completely before the term ends, change lenders, or make extra payments without penalty. However, open mortgages typically have higher interest rates compared to closed mortgages with a similar term.
A closed mortgage has lower interest rates but limits your ability to make extra payments and imposes penalties if you exceed the allowed amount or break the contract. For TD closed fixed-rate mortgages, the prepayment charge is the greater of three months' interest or the interest rate differential. For closed variable-rate mortgages, it is three months' interest. For open fixed or variable mortgages, there is no prepayment charge.
The trade-off is between flexibility (open) and cost (closed). Open mortgages offer penalty-free prepayment but at a higher interest rate; closed mortgages offer lower rates but restrict prepayment and incur charges for early payout.
| Feature | Open Mortgage | Closed Mortgage |
|---|---|---|
| Interest rate level | High-interest rates compared to closed mortgages | Low-interest rates compared to open mortgages |
| Prepayment flexibility | Can pay off mortgage completely before term without penalty; can make extra payments at any time | Limits on extra payments; penalties apply if exceeding allowed amount or breaking contract |
| Prepayment charge (TD) | No charge for prepaying any amount | For fixed: greater of 3 months' interest or IRD; for variable: 3 months' interest |
Sources: TD Canada Trust, Mortgage Calculator
How TD Structures Its Rate Options
TD Canada Trust offers both fixed-rate and variable-rate mortgages. Their variable-rate mortgages are available with a five-year term. Their fixed-rate mortgages come in a wider range of terms, from six months to ten years.
When it comes to prepayment, TD's closed variable-rate mortgages carry a prepayment charge of three months' interest. Closed fixed-rate mortgages have a charge that is the greater of three months' interest or the interest rate differential. In contrast, open fixed and variable-rate mortgages have no prepayment charge.
These structures illustrate how a major Canadian lender applies the general principles of fixed vs variable and open vs closed mortgages, but rates and features vary by financial institution.
Sources: TD Canada Trust
Choosing Based on Your Financial Goals and Risk Tolerance
The right mortgage type depends on your financial goals and comfort with uncertainty.
If you prioritize predictable monthly payments and want protection from interest rate increases, a fixed-rate mortgage may be appropriate. This is especially true if you plan to stay in your home for a long time or have a limited budget for payment fluctuations.
If you are comfortable with some uncertainty and believe interest rates may stay stable or decrease, a variable-rate mortgage can offer a lower initial rate and potential savings. However, you must be prepared for the possibility that rates rise, which could increase your interest costs.
Consider your plans for the property: if you expect to sell or refinance before the term ends, an open mortgage or a shorter term might be more flexible. On the other hand, if you intend to stay for the long term and want the lowest possible rate, a closed mortgage with a longer term might be suitable, provided you are comfortable with its prepayment penalties.
Your risk tolerance is a key factor: if you are unwilling to accept rate fluctuations, a fixed rate is likely the safer choice; if you can tolerate some risk in exchange for potential savings, a variable rate may be worth considering.
Sources: Consumer Financial Protection Bureau, TD Canada Trust
How Fixed and Variable Rate Mortgages Work
Fixed-rate mortgages and variable-rate mortgages differ fundamentally in how the interest rate is set and applied over the term.
With a fixed-rate mortgage, the interest rate is locked in at the start of the term, and your monthly principal and interest payments remain constant. This makes budgeting predictable, but you may pay a higher rate initially compared to a variable mortgage.
With a variable-rate mortgage, the interest rate can change based on market conditions. In Canada, some variable-rate products (like TD's) keep the monthly payment amount the same, but if the prime rate rises, a larger share of your payment goes toward interest, reducing the principal portion. If the rate falls, more goes toward principal. In the U.S., adjustable-rate mortgages may have payments that adjust with the rate.
The core difference is the trade-off between stability and potential savings. Fixed rates offer certainty; variable rates offer the chance to pay less if rates stay low or decrease, but with the risk of higher costs if rates rise.
Sources: Consumer Financial Protection Bureau, TD Canada Trust
Comparison Matrix: Features and Risks
The table below consolidates the key features and risks for fixed-rate and variable-rate mortgages, based on the evidence in this comparison.
| Attribute | Fixed-Rate | Variable-Rate |
|---|---|---|
| Interest rate stability | Fixed for the term | Can change with market |
| Monthly payment stability | Stable principal and interest payments | At TD, payment amount stable but interest portion may change |
| Initial rate level | Typically higher | Typically lower |
| Prepayment charge (closed, TD) | Greater of 3 months' interest or IRD | 3 months' interest |
| Open mortgage availability (TD) | Yes, no prepayment charge | Yes, no prepayment charge |
| Risk | Interest rate risk is limited; early payout may incur a high charge | Interest rate risk can increase costs if rates rise |
Sources: Consumer Financial Protection Bureau, TD Canada Trust
Side-by-Side Category and Decision-Criteria Matrix
This matrix provides a side-by-side comparison of the main mortgage categories and the decision criteria that matter when choosing a product.
| Category | Key Attributes | Decision Criteria |
|---|---|---|
| Fixed-Rate Mortgage | Stable rate; stable payments; typically higher initial rate; available in terms from 6 months to 10 years (TD); closed prepayment charge is the greater of 3 months' interest or IRD | Choose if you prioritize payment stability and protection from rate increases, and are willing to accept a higher initial rate. |
| Variable-Rate Mortgage | Rate can change; at TD, payment amount stable but interest portion can change; typically lower initial rate; available in 5-year term (TD); closed prepayment charge is 3 months' interest | Choose if you can tolerate rate fluctuations and seek potential savings from lower initial rates or falling rates. |
| Open Mortgage | Higher interest rate; no prepayment charge; can pay off or make extra payments without penalty | Choose if you value flexibility, such as the ability to break the mortgage or pay it off early without penalty. |
| Closed Mortgage | Lower interest rate; limits on extra payments; prepayment charges apply for early payout | Choose if you want a lower rate and do not require extensive prepayment flexibility. |
Sources: Consumer Financial Protection Bureau, TD Canada Trust, Mortgage Calculator
Frequently asked questions
What are the main differences between fixed and variable mortgages?
Fixed-rate mortgages have an interest rate that does not change for the term, so your monthly principal and interest payments stay the same. Variable-rate mortgages have an interest rate that can change based on market conditions. In the U.S., adjustable-rate mortgages may have payments that change; in Canada, while the payment may stay the same, the interest portion can change if the prime rate moves.
Sources: Consumer Financial Protection Bureau, TD Canada TrustIs a fixed-rate mortgage always better?
No. Fixed-rate mortgages offer stability, but they typically come with a higher initial interest rate than variable-rate mortgages. The best choice depends on your financial situation and risk tolerance. In the U.S., the majority of buyers (85-95%) chose fixed-rate mortgages between 2008 and 2022, but that does not mean it is better for everyone.
Sources: Consumer Financial Protection BureauHow does the term length affect my payments?
The term length determines how long your mortgage contract and rate are in effect. Shorter terms (e.g., 1-3 years) often come with lower interest rates but require more frequent renewals. Longer terms (e.g., 5 years) provide more extended payment stability. At TD, variable-rate mortgages are only available with a five-year term, while fixed-rate mortgages come in terms from six months to ten years.
Sources: TD Canada TrustWhich type of mortgage has a lower rate currently?
Variable-rate mortgages typically start with a lower interest rate than fixed-rate mortgages. However, current rates can vary by lender and over time, so it is important to check with TD or another lender for today's rates.
Sources: Consumer Financial Protection BureauCan I switch between fixed and variable with TD?
Contact TD directly to inquire about switching options.
What happens if interest rates increase?
If you have a fixed-rate mortgage, your payments do not change. If you have a variable-rate mortgage, the interest portion of your payment may increase (as with TD's product), or your total payment may increase depending on the structure. This could reduce the amount of principal paid down each month.
Sources: Consumer Financial Protection Bureau, TD Canada TrustIs a variable rate mortgage better in a falling rate environment?
Yes, if interest rates fall, a variable-rate mortgage can become less expensive, as the interest portion of your payments may decrease, allowing more of your payment to go toward principal. However, this benefit is not guaranteed and depends on the rate movements.
Sources: Consumer Financial Protection Bureau, TD Canada TrustHow do I know which type suits my situation?
Consider your budget, your plans for the property, and your comfort with financial risk. A fixed-rate mortgage provides predictable payments and protection from rate increases. A variable-rate mortgage offers a lower initial rate but exposes you to market changes. Also consider prepayment flexibility: open mortgages allow penalty-free extra payments and early payout, while closed mortgages have lower rates but may carry penalties for breaking the term.
Sources: Consumer Financial Protection Bureau, Mortgage CalculatorSources
- Understand the different kinds of loans available — Consumer Financial Protection Bureau
- Variable Mortgage Rates - TD Canada Trust — TD Canada Trust
- Mortgage Prepayment Calculator — TD Canada Trust
- Canadian Mortgage Comparison Calculator — Mortgage Calculator