In a fixed rate mortgage, the interest rate is pre-determined at the beginning of the loan term, which can range from 6 months to 25 years. The advantage of this type of mortgage is that it offers a security of knowing your monthly payments beforehand and allows you to plan accordingly.

In a variable or floating rate mortgage, the payments are fixed for a period of one or two years but the interest rates can fluctuate every month 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.