Fixed vs Variable Rate Mortgage: Which is Right for You?
One of the biggest decisions you’ll make when getting a mortgage is choosing between a fixed or variable interest rate. Both have advantages and risks. The right choice depends on your financial situation, risk tolerance, and economic outlook.
What is a Fixed-Rate Mortgage?
With a fixed-rate mortgage, your interest rate stays the same for your entire term (typically 5 years). Your payment amount never changes, regardless of what happens to interest rates in the broader economy.
Advantages of Fixed Rates:
- Payment certainty: Budget confidently knowing your payment won’t change
- Protection from rate increases: If rates rise, you’re locked in at your lower rate
- Peace of mind: No need to watch the Bank of Canada announcements nervously
Disadvantages of Fixed Rates:
- Usually higher starting rate: You pay a premium for the certainty
- Higher penalties: Breaking a fixed-rate mortgage typically costs more than variable
- Miss out if rates drop: You won’t benefit from rate decreases
What is a Variable-Rate Mortgage?
A variable-rate mortgage fluctuates with the prime rate, which is influenced by the Bank of Canada’s policy rate. When the Bank of Canada raises or lowers rates, your mortgage rate typically moves accordingly.
Advantages of Variable Rates:
- Lower starting rate: Variable rates often start lower than fixed
- Lower penalties: Usually just 3 months’ interest if you break the mortgage
- Benefit from rate drops: When rates fall, your rate falls too
- Historical advantage: Studies show variable rates have cost less over time in most periods
Disadvantages of Variable Rates:
- Payment uncertainty: Your payment can increase if rates rise
- Budgeting challenges: Harder to plan when payments can change
- Rate risk: In rising rate environments, you pay more
How to Decide: Questions to Ask Yourself
What’s your risk tolerance?
If payment fluctuations would cause you stress or financial strain, fixed is likely better for you. If you have financial flexibility and can absorb potential payment increases, variable may be worth considering.
What’s your financial buffer?
Could you handle a payment increase of $200-400 per month? If that would stretch your budget too thin, the certainty of fixed makes sense.
How long will you keep this mortgage?
Planning to sell or refinance before your term ends? The lower penalties on variable-rate mortgages could save you significantly.
What’s your view on rates?
If you believe rates will fall or stay stable, variable might be attractive. If you expect rates to rise significantly, locking in makes sense.
📊 Rate Update
The Bank of Canada sets its policy rate eight times per year. Variable mortgage rates typically adjust within a few days of these announcements. We can help you understand the current rate environment and what it might mean for your choice.
The Hybrid Option: Split Mortgages
Some borrowers choose to split their mortgage — putting a portion in fixed and a portion in variable. This provides some payment certainty while still allowing you to benefit if rates drop. Not all lenders offer this option, but we can help you find one if it interests you.
Our Honest Advice
There’s no universally “right” answer. We’ve seen clients do well with both options, and we’ve seen both options cause stress in different rate environments.
What we always recommend: choose based on your personal situation and risk tolerance, not on predictions about where rates will go. Even experts regularly get rate predictions wrong.
Elevation Mortgage
INDEPENDENT MORTGAGE BROKERS · LICENSED AB & BC
Julie & Andy Jeffery — independent mortgage brokers serving Calgary, Nelson BC,
and clients across Alberta and British Columbia.
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