Choosing between a fixed vs variable rate mortgage is one of Canadians’ most significant financial decisions when buying a home or renewing an existing mortgage.
This guide compares fixed-rate and variable-rate mortgages in Canada. It covers how the two types of mortgage rates work, current market conditions, and strategies for managing the risks and maximizing the rewards of each mortgage structure.
An Overview of Fixed and Variable Rate Mortgages
First, let’s look at how fixed and variable-rate mortgages work.
Fixed-Rate Mortgage
With a fixed-rate mortgage, the interest rate is set for the entire mortgage term and cannot fluctuate. The term is typically 6 months to 10 years, with 5 years being the most common.
This means your monthly mortgage payment will remain the same over the set term, providing stability and predictability for budgeting purposes. You know exactly how much each payment goes toward interest vs principal over the term.
Variable-Rate Mortgage
A variable-rate mortgage means the interest rate fluctuates based on the prime rate, which major Canadian banks set based on the Bank of Canada overnight rate.
Variable mortgage rates are quoted in relation to the prime rate, for example, “prime minus 0.5%.” Even as the prime rate changes, the discount or premium set at the beginning remains constant.
With variable-rate mortgages, the interest portion of your monthly payment changes as rates fluctuate. The total monthly payment may remain the same, go up, or go down.
Fixed vs Variable Mortgages Popularity in Canada
Historically, fixed-rate mortgages have been more popular in Canada. The stability and payment consistency provide peace of mind for many homeowners.
However, according to CMHC’s Residential Mortgage Industry Report Spring 2022, when variable rates dropped to record lows in 2021, they surged in popularity, and the majority (53%) of Canadians shifted their preferences in interest rate terms, opting for variable interest rates in the second half of 2021.
As the Bank of Canada began aggressively hiking rates in 2022, fixed rates regained dominance. By the end of 2022, 69% of mortgage holders had fixed-rate terms.
The 2024 CMHC Mortgage Consumer Survey shows that the percentage of consumers who opted for a fixed rate increased from 66% in 2023 to 69% in 2024, and 23% of mortgages contracted are variable rates.
Based on current trends, fixed rates are once again the clear preferred option, though variables still hold appeal for certain borrowers.
What are the Key Differences Between Fixed and Variable-rate mortgages?
There are 6 key differences between fixed and variable-rate mortgages
Interest Rate
The interest rate on a fixed mortgage is based on the Government of Canada bond yields. It is generally higher than variable mortgage rates for the same term to compensate lenders for the reduced risk and guarantee the rate for extended periods.
Variable mortgage rates tend to be lower than fixed rates in a stable environment. However, as this type of rate fluctuates based on changes to the prime rate, it risks rising interest costs if the prime rate trends significantly upwards.
Monthly Payments
With a fixed-rate mortgage, your monthly mortgage payment stays the same over the term, allowing for reliable budgeting.
For variable-rate mortgages, your payment amount can increase or decrease as interest rates change, requiring budget adjustments.
Impact on Amortization
With a fixed-rate mortgage, the portion of your payment toward principal versus interest stays consistent throughout the term. This allows reliable projections for when the mortgage will be paid off.
When the variable rate rises, more of your payment goes toward interest and less toward the principal. This slows the paydown of the mortgage balance. The unpredictability of variable rate impacts makes determining your payoff date more difficult.
Those who value a precise payoff schedule may prefer the consistency of fixed-rate mortgages. In the long run, borrowers focused on minimizing costs may accept the variability of timelines with a variable rate.
Penalties for Breaking a Contract
Fixed-rate mortgages charge high penalties, often equivalent to several months’ interest. With fixed-rate mortgages, you cannot take advantage of lower rates without expensive penalties.
Most variable-rate mortgages only charge a penalty of 3 months of interest if you break your term.
Ability to be assumed and ported
Most fixed-rate mortgages are assumable and portable. However, variable-rate mortgages don’t qualify as assumable/portable mortgages. If you sell your home to buy a new one or transfer it to new buyers, you cannot take over the existing mortgage at its current terms.
Risk Profile
Fixed-rate mortgages carry lower risk but may cost more over the long run. Variable-rate mortgages carry higher risk but may save substantially on interest costs in the long term.
Which Mortgage Structure is Right For You?
Here are some examples of situations where a fixed or variable mortgage may be preferable:
Fixed-rate mortgages tend to be better for
- First-time homebuyers who value payment stability while they establish themselves.
- Borrowers on tight budgets with little wiggle room if payments increase.
- People have anxiety about interest rates and payment unpredictability.
- Someone who plans to move in the next 2-3 years before renewal.
- An investor seeking steady and predictable mortgage payments.
Variable-rate mortgages tend to be better for
- Borrowers who watch rates closely and are ready to act on opportunities.
- Those with flexible budgets that can handle potential payment increases.
- Homeowners who plan to stay long-term past the renewal period.
- Investors with multiple properties are looking to minimize overall interest costs.
- Anyone looking to refinance or move if rates decline meaningfully.
- Those who are comfortable with some risk in exchange for potential savings.
In many cases, a hybrid approach may be appropriate, such as splitting between fixed-rate products. This balances the desire for stability while still capitalizing on variable-rate advantages.
Discover different mortgage term rates in Canada:
- Best 1-Year Fixed Rates
- Best 2-Year Fixed Rates
- Best 3-Year Fixed Rates
- Best 5-Year Fixed Rates
- Best 3-Year Variable Rates
- Best 5-Year Variable Rates
- Best 10-Year Fixed Rates
How to Manage Risks of Variable Mortgages?
Variable-rate mortgages have inherent risks of rising costs and unpredictable payments as the prime rate changes. However, borrowers can use strategies to mitigate these risks.
- Make Lump Sum Prepayments When Rates Are Low
Making lump sum prepayments when variable rates are low allows you to pay down more principal and offset potential payment increases if rates go up later.
- Choose a Product With Flexible Prepayment Options
Opting for variable products that allow unlimited prepayments gives you the most flexibility to pay more when affordable.
- Monitor Rates and Lock Into Fixed When Low
To protect your savings, pay attention to rate trends and lock into a fixed-rate term if variable rates drop to favourable lows.
- Consider Shorter-Term Fixed Rates Initially
One strategy is to start with a 1-3 year fixed term to provide short-term stability while retaining flexibility.
Fixed vs Variable Rate Mortgage FAQs
How to decide between a fixed or variable-rate mortgage?
Assess your risk tolerance and need for payment stability. Calculate your budget at potentially higher variable rates. Consider splitting between fixed and variable products. Consult an expert mortgage advisor.
Penalties for breaking a fixed vs variable mortgage?
Variable mortgages typically only have a 3 month interest penalty, making it easier to break the term. Fixed mortgages charge higher penalties.
Can you convert a variable to a fixed-rate mortgage?
Yes, variable rate mortgage holders can lock into a fixed rate at any time without penalty. This provides helpful flexibility.
How can I manage the risks of a variable-rate mortgage?
Make lump sum payments when rates are low, choose flexible prepayment options, monitor rates, and lock into fixed terms strategically to offset variable rate risk.
Who should choose a fixed vs. variable-rate mortgage?
Fixed rates work for those wanting payment certainty, and variable rates work for those comfortable with some risk and who want to maximize potential savings from rate declines.
The Bottom Line
Fixed-rate mortgages offer payment stability and certainty. Variable-rate mortgages provide flexibility and potential interest savings over the long run, but they also carry the risk of unpredictable costs.
There is no one-size-fits-all answer!
The best way to determine which structure suits your needs is to speak with a mortgage professional. At Best Mortgage Online, our expert mortgage advisors take the time to understand your complete financial picture, goals, and concerns and guide you to the ideal mortgage structure. Contact us now to make the right mortgage decision.
