Fixed vs Variable Mortgage Rates

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 and variable mortgage could impact your financial situation and the interest you pay over the life of the mortgage. 

Deciding whether a variable or fixed mortgage is the best option depends on which suits your needs and circumstances. This post will guide you through the specifics of both types of mortgages, highlighting 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. 
• Variable-rate mortgages are tied to the prime rate, and the interest charged can fluctuate over time. 
• 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 of your mortgage payment will remain the same regardless of changes in interest rates.

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

• Adjustable-rate (ARM): Mortgage payments adjust with 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, a larger portion of your mortgage payment will go toward interest, and less will be applied to the principal. If interest rates decrease, a larger portion of your mortgage payment will be applied to principal rather than interest. 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, as it provides financial predictability and stability, with mortgage payments remaining the same throughout the term. With fixed rates, you can lock in your rate and payment for a specified period, known as your term, typically 1, 2, 3, 4, 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 potential for significant cost savings by opting for a variable rate, as you are more likely to reduce interest costs over the long term. There is also the additional benefit of locking your mortgage into a fixed rate at any time, such as when interest rates start to increase, through 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, as your payments may fluctuate with changes in prime rates, similar to ARMs. 

With VRMs, you 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 the additional risk of over-amortization.

Fixed vs Variable Mortgages

A well-known 2001 study by York University Professor Moshe Milevsky examined fixed and variable mortgage rates between 1950 and 2000. The study found that borrowers saved 90% of the time when they opted for a variable mortgage. The other 10% of the time, this was only sometimes true and heavily depended on various factors.

The study concluded that borrowers are better off locking into a fixed rate if interest rates are low. It’s also important to note that financial markets may not repeat in the same way under completely new socioeconomic constraints compared with when the study was written over 20 years ago.

Which Is Right for You?

The interest rate differential (IRD) penalty on a fixed-rate makes this option only sometimes the most sensible one. A fixed-rate mortgage may be the best choice if you value stability and predictability, or are concerned that interest rates may rise.

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. 

It’s always advisable to look at your financial situation holistically. At any given time, no 2 borrowers 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; at times, the difference between fixed and variable rates has been negligible.

The Canadian mortgage market has undergone significant changes in recent years, with variable rates occasionally surpassing those of fixed rates. This highlights the importance of closely monitoring market trends and considering future interest rate predictions, as well as personal factors, when deciding 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, largely because they offer payment certainty and protection against sudden interest rate changes. 

Borrower preferences tend to move alongside interest rates, with popularity shifting as expectations around future rate movements change. When rates are falling or expected to decline, more borrowers are willing to accept more variability in exchange for potential savings. When rates are rising or there is market uncertainty, borrowers typically shift back to the stability of a fixed term. 

Between 2020 and 2022, variable mortgages gained significant popularity as interest rates fell to historic lows. In January 2020, variable rates accounted for just 7% of newly extended mortgages. By April 2021, they had overtaken fixed rates to become the most popular option, with 37% choosing variable. That trend peaked in January 2022, when variable mortgages made up 58% of new lending, before reversing sharply as rates began to rise, dropping to just 5% by July 2023.

More recently, variable rates regained popularity as interest rates began to decline. In January 2025, variable mortgages accounted for 38% of newly extended mortgages, surpassing 3 to 5-year fixed terms at 35%. As economic uncertainty resurfaced later in the year, borrower preferences shifted again, with 3 to 5-year fixed rates reclaiming the top spot at 43% of new mortgages, compared to 24% for variable rates.

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 Bank of Canada policy. 

Variable-rate mortgages are set based on the Bank of Canada (BoC) policy rate. Lenders adjust their prime rates when the bank changes the policy rate, either increasing or decreasing them in line with monetary policy. Most lenders and financial institutions set their prime rates at the policy rate plus 2.2%. 

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

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

Choosing a fixed rate may be the most sensible option if interest rates increase or are expected to rise. 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 be the most sensible option if interest rates decrease or are expected to decrease. If rates decrease, those who have chosen a fixed rate will be locked into a higher rate for the term, with a significant penalty for breaking the mortgage. Those who choose a VRM will realize immediate cost savings, as more principal will be paid down, shortening the amortization period. Those who choose an ARM will benefit from immediate cost savings through lower mortgage payments. 

Frequently Asked Questions

Final Thoughts

Deciding between 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 fixed principal and interest payments throughout their mortgage term.

To find the most suitable mortgage solution for your borrowing situation, speak with a nesto mortgage expert 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 salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and the quality of their advice. nesto aims to transform the mortgage industry by providing honest advice and competitive rates through a 100% digital, transparent, and 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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