Mortgage Basics

Fixed vs Variable Mortgage Rates in 2024

Fixed vs Variable Mortgage Rates in 2024

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    Buying a home is a significant financial commitment, and one of the first decisions you will need to make when getting a mortgage is whether to choose a fixed or variable mortgage. As a homeowner, the choice you make between a fixed vs variable mortgage could impact your financial situation and the interest you pay over the life of the mortgage. 

    Deciding whether a variable vs fixed mortgage is the way to go depends on which option best suits your needs and circumstances. This post will walk you through the specifics of both types of mortgage available, the key differences and the pros and cons of each.

    Key Takeaways

    • Fixed-rate mortgages offer stability and predictability as interest rates and mortgage payments remain consistent throughout the term. 
    • Variable-rate mortgages are tied to the prime rate, and the interest charged can fluctuate over time if interest rates increase or decrease. 
    • Your financial situation, risk tolerance, and current and future rate projections should guide your choice between fixed and variable.

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    What’s the Difference Between Fixed and Variable Rates?

    A fixed-rate mortgage has a fixed interest rate, meaning it will remain the same throughout the mortgage term. The interest and principal you pay will stay the same for the mortgage term regardless of changes to interest rates.

    A variable-rate mortgage has interest rates that fluctuate, going up or down in response to changes to the prime rate. Variable mortgages can either be: 

    • Adjustable rate (ARM) – mortgage payments adjust based on changes to the prime rate throughout the term. The principal remains fixed; however, the interest component will fluctuate with changes to the prime rate. With an ARM, any changes to interest rates during your term will not impact your remaining amortization.
    • Variable rate (VRM) – mortgage payments remain fixed throughout the term. Any changes to the prime rate will affect your interest and principal. If interest rates increase, more of your mortgage payment will go toward interest and less to the principal. If interest rates decrease, less of your mortgage payment will go toward interest and more toward the principal. With a VRM, any changes to interest rates during your term will impact your remaining amortization.

    Pros & Cons of a Fixed Rate Mortgage

    A fixed rate is beneficial for budgeting purposes and offers financial predictability and stability, given that mortgage payments always remain the same over the mortgage term. With fixed rates, you can lock your rate and payment for a given period called your term, which usually ranges from 1 to 5, 7, or 10 years. Having a set interest rate for the entire term can protect you from any increases in interest rates. 

    Locking into a fixed rate for the entire term can also lead to missing out on lower interest rates should they fall during your term. Even though a fixed rate will provide you with a stable and predictable mortgage payment for years, it will come with a more significant “interest rate differential” penalty. If you decide to break the mortgage before the end of your term, say, to take advantage of lower interest rates, you must pay either the interest rate differential (IRD) or 3 months’ interest, whichever is higher. 

    Pros & Cons of a Variable Rate Mortgage

    Variable rates are beneficial if interest rates decrease during your mortgage term. There is the potential for significant cost savings by going with a variable rate, as you are more likely to save on interest-carrying costs over the long term. There is also the additional benefit of locking your mortgage into a fixed rate at any time, like if interest rates start to increase as an early renewal. Variable mortgages typically have lower overall fees to break the mortgage term, calculated as 3 months of interest. 

    If interest rates increase and you don’t move to a fixed mortgage, there is a chance you could pay significantly more interest. Variable rates can also be challenging to budget since your payments could fluctuate with changes to prime rates, as with ARMs. 

    You also run the risk with VRMs of having most of your payments going toward interest, meaning you could hit your trigger rate (where your mortgage payments no longer cover any principal) or trigger point (the balance owing is higher than the original loan amount) with additional risk of over-amortization

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    Fixed vs Variable Mortgage in 2024: Which is Right for You?

    A well-known 2001 study by York University Prof Moshe Milevsky reviewed fixed and variable mortgage rates between 1950 and 2000 to find that borrowers saved 90% of the time when they took out a variable versus a fixed-rate mortgage. The other 10% of the time showed this to be true only sometimes and heavily depended on different factors. The study concluded that the borrower is better off locking into a fixed rate if interest rates are low. It’s also important to note that financial markets do not repeat in the same manner with completely new socio-economic constraints compared to when Prof Milevsky wrote his York University Study over 20 years ago.

    Of course, the interest rate differential (IRD) penalty on a fixed rate makes this option only sometimes the most sensible one. A fixed-rate mortgage might be the best choice if you value stability and predictability or are concerned that interest rates may increase. If you’re comfortable with some level of risk or there is a chance that rates have hit their peak and will decrease over the next few years, a variable-rate mortgage may be the best choice. 

    Given that the economic outlook for 2024 has predicted a decrease in interest rates, it may be advisable if you can withstand market uncertainty to go with a variable rate to save on interest-carrying costs. Alternatively, a shorter-term fixed rate option may be more suitable if you value predictable payments or have a lower risk appetite. 

    It’s always advisable to look at your financial situation holistically. No 2 borrowers at any given time will have the same factors affecting their risks, needs and goals concerning their borrowing or homeownership.

    Comparing 5-Year Fixed and 5-Year Variable Rates Over Time

    Historical Comparison of the 5-year Fixed and Variable Rate since 2008


    Historically, variable rates have often been much lower than fixed rates. However, this has not always been the case, and there are times when the difference between fixed and variable rates has been negligible.

    The Canadian mortgage market has seen many changes in recent years, with variable rates sometimes moving higher than fixed rates. This underscores the importance of closely monitoring market trends and considering future rate predictions and personal factors when choosing between a fixed and variable rate mortgage.

    Popularity Shifts Between Fixed and Variable Rates Over Time

    Fixed-rate mortgages have traditionally been the more popular choice in Canada. Variable-rate mortgages gained popularity, mainly due to the low interest rates in 2020 throughout 2022. Variable rate mortgages dropped from their peak of roughly 50% of new mortgages in early 2022 to around 6% of new mortgages by the end of 2023. As interest rates rise, the popularity of variable-rate mortgages falls as more borrowers seek the stability of fixed-rate mortgages.

    Drivers for Fixed and Variable Mortgage Rates

    Fixed and variable mortgage rates are influenced by various economic factors, including inflation, unemployment, the Canadian and U.S. economies, and policies set by the Bank of Canada. 

    Variable-rate mortgages are set based on the Bank of Canada (BoC) policy rate. Lenders adjust their prime rates when the bank changes this rate, either increasing it or decreasing it as part of monetary policy. Most lenders and financial institutions keep their prime rates priced at the policy rate + 2.2%. 

    Fixed-rate mortgages follow bond yields of corresponding maturities. Bond yields are indirectly influenced by expectations of how the economy (inflation, unemployment, etc.) performs and how the BoC will respond to this economic performance when adjusting the policy rate in the future. Fixed-rate mortgages are typically priced with a spread of 1-2% higher than the corresponding bond yield. 

    What Rate Type Should You Choose If Rates Increase or Decrease?

    Choosing a fixed rate may make the most sense if interest rates increase or are predicted to increase. A fixed-rate benefits those who don’t have room in their budget for any increases to their mortgage payments or who wish to ride out higher rates by locking in at lower rates. 

    Choosing a variable rate may make the most sense if interest rates decrease or are predicted to decrease. If rates decrease, those who have chosen a fixed rate will be locked into a higher rate for the term with a high penalty to break the mortgage. Those who choose a VRM will realize immediate cost savings as more principal will be paid down, shortening the amortization. Those who choose an ARM will benefit from immediate cost savings through lower mortgage payments. 

    Frequently Asked Questions

    What is a fixed-rate mortgage?

    A fixed-rate mortgage is a type of mortgage where the interest rate remains the same for the duration of the mortgage term. This means your mortgage payments will have both a fixed principal and interest portion, with the total payment remaining unchanged regardless of changes to interest rates.

    What is a variable-rate mortgage?

    A variable-rate mortgage is a type of mortgage where the interest rate can fluctuate based on changes to prime rates. There are two types of variable rates: adjustable rate (ARM) and variable rate (VRM). 

    ARMs have a fixed principal, while the interest will change if the prime rate changes, meaning mortgage payments can increase or decrease. VRMs have a floating principal and interest with a fixed total mortgage payment. If interest rates increase, more of your payment will go toward the interest, with less going toward the principal, and if rates decrease, more of your payment will go toward the principal and less toward interest.

    Can I switch from a fixed-rate to a variable-rate mortgage?

    It is possible to switch from a fixed-rate to a variable-rate mortgage. However, to avoid paying a penalty, you would need to wait until the end of your mortgage term.

    Is it better to get a fixed-rate or variable-rate mortgage?

    The choice between a fixed-rate and variable-rate mortgage will depend on your personal financial situation and risk tolerance. A fixed-rate may be the best choice if you prefer to have predictable and stable payments or cannot weather increases to your mortgage payments. However, if you are comfortable financially and have the risk appetite for increasing rates, a variable-rate mortgage could be the best choice.

    Final Thoughts

    Deciding on a variable or fixed rate is a question of personal choice and risk appetite. While variable mortgages have proven more cost-effective over time than fixed mortgages, some prefer the certainty of having the same payment throughout their mortgage term.

    To find the most suitable mortgage solution for your borrowing situation, speak with our mortgage experts at nesto today.

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    Unlike the industry norm, our agents are not commissioned but salaried employees. This means you’ll get free, unbiased advice on the most suitable mortgage solution for your unique needs. Our advisors are measured on the satisfaction and quality of advice they provide to their clients. 

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