Key Points
- Fixed rates lock in your payment for your entire term
- Variable rates fluctuate with the prime rate
- Variable rates have historically been lower, but not always
- Your risk tolerance matters as much as the rate
- There's no universally 'right' answer — it depends on you
The fixed vs. variable debate is one of the most common questions I get from clients. Let me break down both options clearly so you can make the decision that's right for you.
Fixed Rate Mortgages
With a fixed-rate mortgage, your interest rate is locked in for the entire term — typically 1 to 5 years. Your payment doesn't change regardless of what happens to interest rates in the broader economy. This predictability is the main appeal.
Pros: Certainty and stability. You know exactly what you're paying for the term. Budget-friendly for households with tight cash flow. Peace of mind if rates rise.
Cons: Typically higher than variable rates at the outset. Prepayment penalties can be significant if you need to break the mortgage early (using an Interest Rate Differential, or IRD, calculation).
Variable Rate Mortgages
With a variable rate, your interest rate fluctuates with the bank's prime rate, which moves in response to Bank of Canada decisions. Your payment may stay the same while the principal/interest split changes (static payment variable), or your payment amount adjusts directly (adjustable rate variable).
Pros: Historically lower rates than fixed over the long term. Lower penalties if you need to break the mortgage (typically only 3 months' interest). More flexibility.
Cons: Uncertainty. Your rate can go up. If you're on a tight budget, payment fluctuations can be stressful.
How to Choose
Ask yourself: Can I sleep at night if my rate goes up 1%? If yes, variable might work for you. If no, lock in for the certainty. Also consider: how long are you planning to stay in this home? If you might sell or refinance within a couple of years, variable typically has lower penalties. If you're staying put for 5+ years, fixed might make more sense.
I always model out both scenarios with actual numbers so my clients can see what each option means in dollars — not just percentages. That's how you make a clear-headed decision.
Have a specific question about your situation? Every mortgage is unique. This article covers the general principles, but your circumstances might change the picture. Reach out and I'll give you a direct, honest answer.