Fixed vs Variable Mortgage Rate: Which Is Better For You?

When choosing between a fixed and a variable mortgage rate, it’s tempting to just go with the cheaper option and be done with it.

But this decision can have a major impact on your finances going forward, so you don’t want to rush it. It’s important to understand how each mortgage type works, and which one fits both your current financial situation and your near-term goals.

It can also be helpful to know why people generally choose one interest rate type over the other. Let’s start there.

Fixed-rate mortgages are the most popular mortgage type in Canada. Fixed rates give you stability and protect you from rate volatility until the mortgage term is up.

With a fixed-rate mortgage, you pay the same interest rate for your entire mortgage term, whether it’s six months, five years or longer. (The longer the term, the lower the rate tends to be.) Even if current fixed mortgage rates increase or decrease, your rate and monthly payment will remain the same.

Risks of choosing a fixed mortgage rate:

Types of fixed-rate mortgages

With a variable-rate mortgage, your interest rate follows movements in prime rates. That means the amount of interest you pay can change in any month. You are essentially betting that rates will stay the same or drop during your mortgage term.

Economic volatility can cause unsettling rate changes. Imagine you bought a house in January 2022. By July 2023 your variable mortgage rate could have increased by more than five percentage points. Historically, though, variable rates have rarely ramped up at such a blistering pace.

Variables come in different term lengths, but many last five years. Variable rates are unlikely to remain the same for five consecutive years, so you should expect some rate movement if you go with a variable mortgage. The number of rate changes, the magnitude of those changes and the direction of change are all impossible to predict with much accuracy. There’s a risk your rate could go higher, but there’s also the possibility of it dropping multiple times, which can make variables enticing.

Variable-rate mortgages also come with smaller penalties than fixed-rate mortgages — generally three months’ interest — if you break your mortgage contract mid-term.

Risks of choosing a variable mortgage rate:

Types of variable-rate mortgages

As with fixed-rate mortgages, variable-rate mortgages come in both open and closed varieties. But there are other mortgage types to be aware of.

Fixed payment variable-rate mortgages make up the majority of Canada’s variable-rate mortgages. With these, your monthly mortgage payment stays the same even if mortgage rates change. If rates decrease, more of your payment will be put toward the principal. Yet if rates rise, more goes toward interest. If rates rise significantly, however, and your monthly payment no longer covers your loan’s interest charges, you’ll reach the trigger rate. If you reach the trigger rate, you must work with your lender to find a solution.

Variable rates that don’t have fixed payments are known as adjustable-rate mortgages. With an adjustable-rate mortgage, your actual monthly payments rise and fall in concert with any interest rate changes. Adjustable-rate mortgages have the least amount of predictability and can make it harder for you to budget.