Fixed vs. Variable Mortgage Rates: Which Is Right for You?

When buying a home in Canada, one of the biggest financial decisions you’ll make is choosing between a fixed or variable mortgage rate.

Both options have advantages and drawbacks, and the right choice depends on your financial situation, your tolerance for risk, and the state of the market.

This guide breaks down how fixed and variable mortgage rates work, their pros and cons, and how to decide which one fits your needs.

What Is a Fixed Mortgage Rate?

A fixed mortgage rate means your interest rate stays the same for the entire term of your mortgage (often 1 to 5 years, though some lenders offer longer). Your payments remain predictable and unchanged, regardless of what happens in the market.

Pros of a fixed rate:

• Stability and predictable monthly payments.
• Protection against rising interest rates.
• Easier budgeting and long-term planning.

Cons of a fixed rate:

• Generally higher rates compared to variable options (at least initially).
• Less flexibility if market rates drop.
• Penalties for breaking a fixed mortgage can be costly, often based on the interest rate differential (IRD).

What Is a Variable Mortgage Rate?

A variable mortgage rate is tied to the lender’s prime rate, which moves up or down depending on the Bank of Canada’s interest rate decisions. Your payments may change during your term — either by adjusting the payment amount or the portion going toward interest versus principal.

Pros of a variable rate:

• Historically, variable rates have often cost less over the long term.
• Lower initial interest rates compared to fixed.
• Some flexibility — certain lenders let you convert to a fixed rate during your term.

Cons of a variable rate:

• Payments can increase if interest rates rise.
• Harder to predict long-term costs.
• May cause financial stress if rates climb quickly.

How Market Conditions Influence Your Choice

In Canada, mortgage rates are heavily influenced by the Bank of Canada’s policy rate. When inflation is high, rates often rise to cool the economy. When growth slows, rates may drop to stimulate borrowing.

• If rates are expected to rise, fixed rates offer peace of mind.
• If rates are stable or expected to fall, variable rates may help you save.

Who Should Choose Fixed Rates?

Fixed mortgage rates are often better for:

• First-time homebuyers who need predictable payments.
• Families with tight budgets and little room for surprises.
• Homeowners who plan to stay in their property long term.
• People who worry about rate fluctuations and prefer stability.

Who Should Choose Variable Rates?

Variable mortgage rates may suit:

• Homeowners with flexible budgets who can handle possible payment increases.
• People who closely follow the market and are comfortable with risk.
• Borrowers who want to take advantage of historically lower rates.
• Those who plan to sell or refinance before potential rate hikes.

The Hybrid Option: Split Mortgages

Some Canadian lenders offer a combination of fixed and variable rates in one mortgage. For example, half your mortgage might be fixed, and the other half variable. This “hybrid” option balances risk and stability, giving you partial protection against rising rates while still letting you benefit if rates drop.

Key Considerations Before Deciding

• Your risk tolerance: Can you handle possible payment increases?
• Your financial goals: Are you focused on stability, or maximizing potential savings?
• Your timeline: Do you plan to stay in the home long-term or just a few years?
• Market outlook: Where are rates headed? Even experts can’t predict perfectly, but economic forecasts matter.

Final Thoughts

There’s no one-size-fits-all answer when choosing between fixed and variable mortgage rates in Canada. Fixed rates give you security, while variable rates may save money if you can handle uncertainty.

The best approach is to assess your financial situation, consider your comfort with risk, and talk to a mortgage advisor who can help you compare current options.

With the right choice, your mortgage won’t just finance your home — it will also support your long-term financial stability.