Fixed vs Variable Mortgage Rate: How to Choose | Canada

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Fixed vs Variable: How to Make the Right Choice

The debate between fixed and variable rates is probably the most common question Canadian mortgage borrowers face. There is no universal answer: the best choice depends on your personal situation, risk tolerance, and current economic conditions. Here are the essential elements for making an informed decision.

Fixed Rate: Stability and Predictability

With a fixed mortgage rate, your interest rate and payments remain the same for the entire duration of your term (typically 1 to 5 years, sometimes up to 10 years). Regardless of what happens in financial markets or with the Bank of Canada's policy rate, your monthly payment does not change. This stability makes budget planning easier and eliminates stress from rate fluctuations. In return, the fixed rate is generally higher than the variable rate at the time of origination, as the lender incorporates a premium for the risk they assume by guaranteeing the rate for the full term.

Variable Rate: Flexibility and Savings Potential

The variable rate is expressed as a discount or premium relative to the lender's prime rate (for example, prime − 0.50%). When the Bank of Canada changes its policy rate, financial institutions adjust their prime rate, which causes your mortgage rate to fluctuate. There are two variants: an adjustable payment mortgage (your payments fluctuate immediately) and a fixed-payment variable-rate mortgage (your payments remain stable but the principal-interest split changes).

Essential Decision Criteria

Risk tolerance: if the idea that your payments could increase by $200 to $400 per month causes you anxiety, a fixed rate is likely preferable. If you can absorb this variation without difficulty, variable deserves consideration.
Budget flexibility: calculate the impact of a 2% rate increase on your payment. If this increase prevents you from covering essential expenses, choose fixed.
Holding horizon: if you plan to sell or refinance before the end of the term, variable rates generally offer much lower prepayment penalties (3 months' interest instead of the interest rate differential).
Economic conditions: during periods of high rates where the market anticipates cuts, variable can be advantageous. During low-rate periods with expectations of increases, fixed protects your budget.
First-time buyer profile: first-time buyers adjusting to a new mortgage payment often benefit from the predictability of a fixed rate to avoid financial shock.

The Hybrid Strategy: Combining Fixed and Variable

Some borrowers choose to split their mortgage into two portions: a fixed-rate portion for security and a variable-rate portion for savings potential. This approach allows partial benefit from the advantages of both options. However, it can complicate renewal and limit your flexibility to switch lenders. Discuss this strategy with your AMF-certified mortgage broker to déterminé if it suits your situation.

Frequently Asked Questions

Is the variable rate always cheaper than the fixed rate?

No, not always. Historically, variable rates have been less costly in about 80% to 90% of cycles, but there have been periods (notably during rapid rate increases like 2022-2023) where the variable rate exceeded the initially offered fixed rate. The outcome depends on future rate movements, which are unpredictable.

What happens if rates rise with a variable-rate mortgage?

It depends on the type of variable mortgage. With a variable payment (adjustable) mortgage, your monthly payments increase immediately. With a fixed-payment variable-rate mortgage, your payments stay the same but a larger portion goes toward interest rather than principal. In extreme cases, you can reach the trigger rate where your payment no longer covers the interest.

Does a fixed rate fully protect against rate increases?

Yes, for the duration of your term, your payments and rate are guaranteed. However, at renewal, you will be exposed to market rates at that time. If your term is 5 years and rates have risen significantly, your payments will increase at renewal.

What type of borrower should consider selecting a fixed rate?

A fixed rate suits borrowers who prioritize budget predictability, have a tight budget with little room for flexibility, are first-time buyers adjusting to new mortgage payments, or are stressed by financial uncertainty. If a 1% to 2% increase in your mortgage rate would cause financial hardship, fixed is likely the best choice.

What type of borrower should consider a variable rate?

A variable rate may suit borrowers who have sufficient budget flexibility to absorb payment increases, plan to pay off their mortgage quickly or sell within a few years, understand and accept the risk of fluctuation, or want to take advantage of typically lower prepayment penalties (3 months' interest vs. interest rate differential).

Can I switch from variable to fixed during my term?

Most lenders offer the option to convert your variable rate to a fixed rate during your term, but the fixed rate offered will be the one in effect at the time of conversion, not from the start of your term. Fees may apply depending on your contract. Consult your AMF-certified mortgage broker for your options.