Fixed vs Variable Mortgages
The most important decision you'll make after choosing your home. Learn the pros, cons, and real-world scenarios to pick the right mortgage type.
Quick Comparison
| Feature | Fixed Rate | Variable Rate |
|---|---|---|
| Interest Rate | Stays the same for entire term | Changes with prime rate |
| Starting Rate | Higher initially | Lower initially |
| Monthly Payment | Predictable | Can fluctuate |
| Penalty to Break | Higher (IRD or 3 months) | Lower (3 months only) |
| If Rates Rise | Protected | Payment increases |
| If Rates Drop | Miss out on savings | Automatic savings |
| Historical Performance | — | Saved money ~88% of time |
How Each Type Works
Fixed Rate Mortgage
Your interest rate is locked in for the entire term (typically 1-5 years). If you choose a 5-year fixed at 4.5%, you'll pay 4.5% for all 5 years regardless of what happens in the market.
Rate is based on: Government of Canada bond yields at the time you lock in.
Example:
$400,000 mortgage at 4.5% = $2,218/month for 5 years guaranteed
Variable Rate Mortgage
Your rate fluctuates with the prime rate, expressed as "prime minus X%" (e.g., prime - 0.90%). When prime goes up, your rate goes up. When prime drops, so does your rate.
Rate is based on: Bank of Canada overnight rate, which influences prime.
Example:
Prime 6.70% - 0.90% = 5.80% today (but this rate can change)
Pros and Cons
Fixed Rate Mortgage
Advantages
- Payment never changes during term
- Budget with complete certainty
- Protected if rates rise significantly
- Peace of mind for risk-averse borrowers
- Easier to plan long-term finances
Disadvantages
- Higher starting rate than variable
- Large penalties to break (IRD)
- Miss savings if rates drop
- Historically costs more over time
- Less flexibility if life changes
Variable Rate Mortgage
Advantages
- Lower starting rate
- Only 3-month interest penalty
- Benefit automatically if rates drop
- Saved money ~88% of 5-year terms
- More flexibility to break/refinance
Disadvantages
- Payments can increase
- Uncertainty and stress for some
- Budgeting is harder
- Risk of "trigger rate" if rates spike
- May pay more if rates rise substantially
Which Should You Choose?
The right choice depends on your personal circumstances, risk tolerance, and financial situation. Consider these factors:
Choose Fixed If You:
- ✓ Have a tight monthly budget with no room for higher payments
- ✓ Lose sleep worrying about rate changes
- ✓ Plan to stay in the property for the full 5-year term
- ✓ Believe rates will rise significantly
- ✓ Are a first-time buyer wanting predictability
Choose Variable If You:
- ✓ Can handle $200-$500 monthly payment fluctuations
- ✓ May sell or refinance before term ends
- ✓ Want lower penalties for flexibility
- ✓ Believe rates will drop or stay stable
- ✓ Have emergency savings as a buffer
The Historical Reality
Studies consistently show that variable-rate mortgages have saved borrowers money approximately 88% of the time over 5-year terms. However, past performance doesn't guarantee future results, and the ~12% of times fixed won included some significant rate spike periods.
Important Consideration
In 2022-2023, variable-rate holders saw prime rate increase from 2.45% to 7.20% in just 18 months—the fastest increase in Canadian history. Those with variable rates saw payments jump significantly. This is the risk you accept with variable.
Hybrid Options
Can't decide? Consider these middle-ground options:
- Convertible Variable: Start variable with the option to lock into fixed anytime without penalty
- Shorter Fixed Term: Take a 2-3 year fixed instead of 5 years for lower rates and faster flexibility
- Split Mortgage: Some lenders let you put 50% fixed and 50% variable
Frequently Asked Questions
Need Help Deciding?
Our mortgage experts can walk you through both options based on your specific situation.
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