Generally fixed rate mortgages bear slightly higher interest rates than variable rate mortgages. This is because with a fixed rate mortgage the bank is guaranteeing your rate for a period of time no matter what happens in the economy. If Canadian interest rates go up and you have a fixed rate mortgage, your interest rate will stay the same.
Fixed rate mortgages also usually compound semi-annually (2 times per/year) where variable rate mortgages usually compound monthly (12 times per/year). If a bank it offering a variable mortgage rate that is within 1% of the fixed rate mortgage then the “amount” of interest that you end up paying is almost the same.
The reason variable rate mortgages are often offered at lower interest rates is because the interest floats with whatever the Bank of Canada lending rate is. If the Bank of Canada increases its lending rate and you have a variable rate mortgage, your interest rate will be increased accordingly.
In the past 10 years Canada has seen historically historically low interest rates and so many Canadian have gotten comfortable with variable rate mortgages while to the consumer they bear a higher risk. Low interest rates are a sign of economic instability and so when they are extremely low, they have nowhere to go but up. In Canada the Bank of Canada has announced 3 interest rate increases in the past 12 months.
So how do you decide what type of mortgage is best for you? Well that depends on your financial goals. If you plan to be in your home 5 years or longer it may be a good time to see what fixed rate mortgages are available. If you plan to move in the next year or two a variable rate mortgage may make more sense because interest rates are still very low and so you have less risk by choosing a variable rate mortgage and watching the economy. Most Canadian banks that offer variable rate mortgages offer an option to lock in.
The best thing to do to find out your options is consult a local mortgage broker. Mortgage brokers generally have relationships with all of the major Canadian Banks. They also deal with other banks like ING and PC Financial who offer mortgage financing in Canada but do not have a retail presence. A mortgage broker can educate you about your mortgage options and help you plan for a mortgage that will ensure you achieve all of your financial goals.