Should you go with a fixed or variable mortgage?

(This article has been updated from a previous version.) 

When you buy a home, one of the first big decisions you’ll need to make is choosing between a fixed-rate and a variable-rate mortgage. 

A fixed-rate mortgage lets you lock in an interest rate for the entire term of your loan, providing peace of mind no matter how the market changes. On the other hand, a variable-rate mortgage means your interest rate will change based on the Bank of Canada’s quarterly decisions, which can be a bit of a rollercoaster.  

It’s possible for Canadians to benefit from a hybrid option, which allows borrowers to take advantage of both variable and fixed rates. They’re partially protected in case rates go up and have the benefits of a variable rate if the interest falls. But for now, we’ll focus on fixed- and variable-rate mortgages, as they are the most common in Canada. 

According to a 2023 report from Canadian Mortgage Trends, 69% of mortgage holders had a fixed-rate mortgage in 2022. That was up from 66% the previous year. Meanwhile, 25% of mortgage holders went with variable-rate mortgages, a drop from 26% in 2021.  

If you’re buying a new home, renewing or refinancing an existing mortgage, which type of mortgage should you go with? Let’s look at the pros and cons of each: 

The pros and cons of a fixed-rate mortgage 

As the name implies, a fixed-rate mortgage remains the same for the entire mortgage term. Your interest rate and payments remain the same. These mortgage rates are set by the five-year government bond yields at the time of purchase.  

Pros: 

• You know exactly how much interest you’re paying on every single mortgage payment. This can help you when planning your household budget.  
• You’re immune to the effects of fluctuating interest rates. 

Cons: 

• Fixed interest rates have historically tended to be higher than variable rates. The difference is often less than 1%, but that can add up over the years.  
• Penalties can get expensive if you decide to break your current mortgage to take advantage of lower rates.  

Read more: All you need to know about fixed-rate mortgages and the interest rate differential 

The pros and cons of a variable-rate mortgage 

Variable-rate mortgages are subject to rate fluctuations when there are changes to the prime rate (which is informed by the Bank of Canada’s benchmark overnight lending rate) . You’ll often hear that variable mortgage rates are “set at prime plus or minus” a certain percentage, which could be a discount or a premium set on the prime rate.  

This can affect your payments and the amount of interest you pay on your mortgage. If the prime rate increases, so does your mortgage rate, meaning more of your payment goes toward paying off the interest instead of the principal. On the other hand, if the prime rate is cut, the opposite happens. 

Pros: 

• Variable-rate mortgages often have lower interest rates than fixed-rate mortgages, which can mean more money being put toward the principal.  
• It’s easier to lock into a fixed-rate mortgage if rates start rising, whereas it’s harder and more expensive to break a fixed-rate mortgage due to penalties.  

Cons: 

• Your payments could go up depending on the prime rate. If the prime rate goes up, more of your payment will go toward the interest versus the principal. 
• You will have to be aware of what the prime rate is doing in case you’re interested in locking into a fixed-rate mortgage. There’s no “setting and forgetting” with variable-rate mortgages.  

Read next: 10 questions to ask when getting a mortgage 

Which is better: a fixed-rate or variable-rate mortgage?  

If you’re risk-averse and like knowing how much you pay every month, then a fixed-rate option will work for you.  

If you’re not as risk-averse, have the financial means to afford a slightly higher payment, and are willing to keep an eye on the prime interest rate or email your mortgage broker regularly, then a variable rate might be the better option.  

However, interest rates aren’t everything. Sure, when you’re shopping around for a mortgage, it’s always important to compare the interest rates between fixed and variable rates. But you should also look at: 

• Mortgage principal  
• Amortization period 
• Payment frequency 
• Whether or not your lender requires you to have title insurance 
• Your property taxes. Will you be able to afford both the mortgage payment and the taxes?  
• Whether your mortgage is open or closed (so you can pay it off faster), assumable (meaning a buyer could take over the mortgage when you sell your home without any changes to the term), or portable if you move to a new home. 

Learn more: Government of Canada programs to support homebuyers in 2024 

Take the time to understand your financial position and get a mortgage that’s right for your needs. By carefully considering all these factors, you can make an informed decision that provides stability for your future.