How a fixed-rate mortgage works
With a fixed-rate mortgage, the interest rate is set when the loan is issued and does not change for the life of the loan — commonly 15, 20, or 30 years. Because the rate is constant, the principal-and-interest portion of the monthly payment is also constant for the entire term.
The trade-off for that certainty is usually a higher starting rate than a comparable variable-rate loan, since the lender is taking on the risk that market rates might rise later.
How a variable-rate mortgage works
A variable-rate mortgage (often called an adjustable-rate mortgage, or ARM) starts with a rate tied to a benchmark, such as a central bank rate or a market index, plus a lender margin. Many variable loans offer an initial fixed period — for example, five years — before the rate begins adjusting on a set schedule, such as annually.
When the benchmark rate moves, the loan's rate moves with it, and the monthly payment is recalculated. This means the payment can go up or down over the life of the loan, and most ARMs include rate caps that limit how much the rate can change at each adjustment and over the life of the loan.
Comparing the total cost
The right comparison isn't just the starting rate — it's the total interest paid under realistic scenarios for how rates might move. If rates fall or stay flat, a variable-rate loan can end up cheaper than a fixed-rate loan taken at the same time. If rates rise significantly, a variable-rate borrower can end up paying substantially more than they would have with a fixed rate.
A mortgage calculator that lets you test both a fixed scenario and a stepped-up variable scenario side by side is the most reliable way to see the range of outcomes for your specific loan amount and term, rather than relying on the starting rate alone.
Which one fits your situation
A fixed rate tends to suit borrowers who value predictable payments, plan to stay in the home for the full loan term, or are borrowing when rates are relatively low and want to lock them in.
A variable rate can suit borrowers who expect to move, refinance, or pay off the loan well before the rate starts adjusting, or who are comfortable absorbing some payment uncertainty in exchange for a lower starting cost.
This is general, educational information, not financial advice — a mortgage is a long-term commitment, and the right choice depends on your income stability, timeline, and risk tolerance. Consider speaking with a licensed mortgage advisor before deciding.
Frequently asked questions
Can a variable-rate mortgage payment go down as well as up?
Yes. Because the rate tracks a benchmark, the payment adjusts in both directions as that benchmark rises and falls, subject to any caps in the loan agreement.
Is a fixed-rate mortgage always more expensive?
Not necessarily in total — it usually starts with a higher rate, but whether it costs more overall depends on how market rates actually move over the loan term, which cannot be known in advance.
What is a rate cap?
A rate cap is a contractual limit on how much a variable rate can increase at a single adjustment, and over the life of the loan. Caps protect the borrower from unlimited rate increases but don't eliminate rate risk entirely.
Can I switch from a variable to a fixed rate later?
Often yes, through refinancing, though this typically involves closing costs and is subject to qualifying for the new loan. Some lenders also offer a conversion option built into the original loan terms.