Helping Clients Decide Between Fixed and Variable Rates
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One of the most common questions clients bring to advisors is whether to choose a fixed or variable mortgage. The most suitable solution depends less on predicting markets and more on matching the mortgage to cash flow, life events, and risk tolerance.
Fixed rates provide certainty. Payments stay consistent, which makes them ideal for households with little flexibility in their monthly budget or first-time buyers managing homeownership costs for the first time. Fixed terms also work well for clients who value stability, particularly if they expect to ride out their mortgage term completely.
Variable rates, by contrast, offer flexibility and the potential for savings if the Bank of Canada continues easing rates. They are also easier to break, since penalties are usually capped at three months’ interest. This option often suits clients with more substantial financial buffers, investors managing multiple properties, or families who anticipate moving or refinancing in the near future.
The Two Flavours of Variable Mortgages
Not all variable mortgages behave the same way, and financial advisors need to help clients understand the distinction, even if lenders don’t make this easy to understand or digest.
An adjustable-rate mortgage (ARM) resets the payment amount whenever the lender’s prime rate changes. The amortization stays on track, but the monthly cost can rise or fall with every move from the Bank of Canada. This benefit can also make ARMs less predictable for budgeting, but they give clients a clear picture of their payoff timeline. Think of ARMs as “buy now, pay/save now” plans.
A variable-rate mortgage (VRM) keeps the monthly payment fixed, even if the rate changes. Instead, the mix of interest and principal inside that payment shifts. If rates rise, more of the payment goes to interest and less to principal, which can stretch the amortization period. If rates fall, the opposite happens, and clients pay down their mortgage faster. Think of VRMs as “buy now, pay/save later” plans.
For financial advisors, this nuanced difference is significant because it impacts cash flow planning. ARMs can strain budgets in a rising-rate cycle, while VRMs can distort timelines and projections for debt repayment. Matching the most suitable type of variable mortgage to a client’s financial plan and strategy is just as crucial as deciding between fixed and variable in the first place.
Nesto Quick Guide to Fixed vs Variable
| Factor | Fixed Mortgages | Variable Mortgages |
|---|---|---|
| Starting Rate | Historically lower than variable rates | Historically higher than fixed rates |
| Stability | Payments are predictable and stable | Payments (ARM) or amortization (VRM) may fluctuate |
| Flexibility | Less flexible, locked in until the mortgage matures | More flexible, typically lenders allow holders to convert to fixed anytime without penalty |
| Response to BoC Rate Cuts | No benefit and unaffected if BoC cuts rates | Immediate benefits of saving interest with a lower monthly payment (ARM) or reducing amortization (VRM) when the BoC cuts rates |
| Response to BoC Rate Hikes | No change and unaffected if BoC hikes rates | Increases carrying costs as the monthly payment increases (ARM) or the amortization increases (VRM) |
| Penalty to Break | Higher penalties, often interest rate differential (IRD) – typically thousands more compared to 3 months’ interest | Lower penalties, usually capped at 3 months’ interest |
| Conversion Options | Cannot convert to a variable without paying the IRD penalty | Convertible to fixed anytime (same or longer term) |
| Qualification Ease | Easier to keep the prequalified amount intact if interest rates change | Qualifying amount changes if interest rates change |
| Impact on Cash Flow | Provides certainty, acts like cash flow insurance | Risk of fluctuating payments (ARM) unless fixed-payment (VRM) |
| Portability/Reset Risk | Rates are not reset when ported | Discounts can reset when ported to a new property |
| Best Fit For | First-time buyers, households on tight budgets, clients seeking stability | Clients with strong buffers, investors, and families are likely to move or refinance |
3 Core Factors That Matter When It Comes to Mortgage Financing
Financial advisors can help clients by framing the decision around 3 core factors. These factors include the amount of room they have in their budget to absorb a higher payment, whether significant life changes are likely in the next few years, and whether the client is comfortable with a mortgage payment or its repayment timeline, which could fluctuate. This approach eliminates the guesswork of trying to time the market and instead focuses on protecting the financial plan from unnecessary surprises.
Mortgage contracts are complex, and the choice between fixed and variable is only one part of the story. Prepayment penalties, portability rules, and assumability clauses can be just as essential to long-term outcomes as the rate itself. Ensuring clients understand these details helps preserve the integrity of broader financial strategies, including retirement planning, investment management, and debt repayment.
Partner With Mortgage Experts to Strengthen Your Advice
Mortgages touch every part of a client’s plan, and getting them wrong can be costly. By deepening your mortgage knowledge and working with nesto mortgage experts, you can help clients make confident choices, avoid unexpected pitfalls, and keep their financial strategy on track.
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.
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