Fixed vs. Variable: Choosing The Right Mortgage Rate
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 the choice is often a little more complicated than that. Making the right decision requires understanding some key details about each rate type.
Fast facts: Fixed vs. variable mortgage rates
Fixed rates offer 100% payment predictability but can carry severe penalties if you break them early.
Variable rates fluctuate with your lender's prime rate but offer lower pre-payment penalties and more flexibility.
The bottom line: Choose fixed if you're on a strict budget; choose variable if you want optionality.
The difference between fixed and variable mortgage rates
The main difference between fixed and variable mortgage rates is the amount of interest rate risk you’ll encounter:
Fixed mortgage rates don’t change for the duration of a mortgage term.
Variable mortgage rates can rise or fall mid-term. They move in the same direction as your lender’s prime rate.
When you sign on for a fixed-rate mortgage, there’s no risk of your interest rate increasing (at least not until you have to renew your mortgage). A variable rate, however, could increase multiple times.
Why variable rates fluctuate
Variable rates inch up anytime the Bank of Canada raises its overnight lending rate, so there’s nothing you can do to prevent your rate from rising. If it rises, either your mortgage payment will increase or the portion of your payment that goes toward interest will.
How a rate change impacts your finances depends on whether you choose:
An adjustable-rate mortgage (ARM). Your monthly payment changes when rates change.
A variable-rate mortgage (VRM). Your monthly payment stays the same, but the amount that goes toward interest rises or falls.
The typical Bank of Canada rate hike adds 0.25% to variable mortgage rates. Stack four of those in a row, which is unlikely but not unheard of, and your rate will be 1% higher than when you agreed to it.
If the Bank of Canada lowers its overnight rate, all of this happens in reverse and your mortgage costs decrease.
Advantages and disadvantages
While the main advantage of fixed rates is their predictability, variable rates’ main selling point is flexibility.
A variable mortgage rate can be switched to a fixed rate mid-term without triggering pre-payment penalties. This can be a valuable emergency measure if your variable rate has increased significantly and switching to a lower fixed rate will help you manage your finances.
Fixed mortgage rates cannot be switched to variable rates mid-term. If your fixed-rate mortgage is no longer affordable at a time when variable rates are lower, you’ll have to break your mortgage and refinance in order to go variable.
Breaking a mortgage is where variables have another advantage over fixed rates:
Breaking a fixed-rate mortgage can lead to pre-payment penalties in the tens of thousands of dollars, depending how far along you are in your mortgage term.
Breaking a variable-rate mortgage will result in a maximum penalty of three months’ interest.
This is a really important consideration if you’re not sure whether you’ll stay in your home for the entire mortgage term. Always ask your mortgage advisor to clarify how a lender calculates their fixed-rate pre-payment penalties.
Are fixed or variable rates the cheaper option?
Historically, variable rates have tended to save people more money. The rates themselves have typically run lower than fixed rates, and the pre-payment penalties don’t add as much to overall borrowing costs than those attached to fixed rates.
One exception was in the post-COVID period, when the Bank of Canada had to raise its overnight rate several times to fight runaway inflation. Variable rates shot up in the fall of 2022 and were the most expensive option for about a year and a half.
It's a unique example, but that kind of uncertainty is why fixed rates have typically been the most popular choice among Canadians.
Fixed vs. variable: The details that matter
Feature | Fixed-rate mortgage | Variable-rate mortgage |
|---|---|---|
Rate stability | Will not change during the term. | Can fluctuate mid-term based on your lender's prime rate. |
Pre-payment penalty | Based on a lender’s unique Interest Rate Differential calculation. Can cost three months’ interest or tens of thousands of dollars. | Capped at three months' interest. |
Mid-term switch? | Cannot be switched to a variable without breaking your mortgage contract. | Can be switched to fixed mid-term penalty-free. |
Cost comparison | Typically more expensive. You're paying a premium for certainty. | Historically cheaper in the long run. |
Decision time: Is a fixed or variable rate mortgage rate better for you?
A fixed mortgage rate is your best option if:
You’ll take comfort in having a predictable monthly mortgage payment.
You’re on a tight budget that can’t absorb higher mortgage payments.
You’re confident that you won’t break your mortgage mid-term.
A variable mortgage rate is the better choice if:
You’re comfortable with risk.
You can afford paying a higher interest rate than the one you signed on for.
You’re unsure whether you’ll stay in your home for the duration of your mortgage term.
Frequently asked questions
Which is better, a fixed- or variable-rate mortgage?
A fixed rate is a better match if you're on a strict monthly budget. Variable rates are historically cheaper, but your monthly costs might fluctuate.
Should I go fixed or variable for my mortgage renewal?
It depends entirely on which rate type aligns with your current financial needs. After factoring in the cost, go fixed if you need predictability; go variable if you need optionality.
What is a variable-rate mortgage’s trigger rate?
Hitting your trigger rate means your mortgage payment is no longer covering your monthly interest charges. This can happen after a series of interest rate increases changes the composition of your mortgage payment. Hitting your trigger rate will require working out a solution with your lender.
Can I switch my mortgage rate type?
You can switch a variable rate for a fixed rate during your mortgage term without incurring a prepayment penalty. Your lender can help complete the process fairly easily.
The new fixed rate will be based on a lender’s posted mortgage rates, not their special advertised rates, so the savings might be underwhelming.
Should I switch my variable rate mortgage for a fixed rate?
Switching from a variable- to a fixed-rate mortgage can help make your mortgage more affordable if fixed rates are noticeably lower than variables — and if you’re reasonably sure you won’t need to break your new fixed-rate mortgage contract.
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Clay Jarvis
Clay Jarvis
Clay Jarvis
Clay Jarvis