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 mortgages available, the key differences, and the pros and cons of each.

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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 portions on your mortgage payment will stay the same 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. 

With VRMs, you also run the risk of having most of your payments go 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. 

Fixed vs Variable Mortgage in 2025: 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 2025 has predicted a decrease in interest rates, it may be advisable to go with a variable rate to save on interest-carrying costs if you can withstand market uncertainty. 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

_{Source: BankofCanada.ca}

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 fixed and variable-rate mortgages.

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 and 2022. Variable-rate mortgages (VRM) 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.

In July 2024, fixed-rate mortgages ranging from 3 to less than 5 years accounted for over 50% of all newly extended mortgages, making them the most popular choice. The higher cost of borrowing and predictions of lower interest rates into 2025 have shifted popularity to shorter fixed-term mortgages. Meanwhile, 5-year terms comprise only 12% of newly extended mortgages, and variable mortgages comprise only 9%.

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 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

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.

Why Choose nesto

At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned, salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

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