Fixed vs Variable Mortgage Rates: Which is Right for You?
One of the most important decisions you'll make when getting a mortgage is choosing between a fixed or variable interest rate. Each option has distinct advantages and risks, and the right choice depends on your financial situation, risk tolerance, and market conditions. Let's break down everything you need to know.
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage locks in your interest rate for the entire term of your mortgage (typically 1-5 years). Your rate and payments stay the same regardless of what happens in the broader economy.
Pros of Fixed Rates
- Predictable payments - Budget with confidence knowing your payment won't change
- Protection from rate increases - You're insulated if interest rates rise
- Peace of mind - No stress about market fluctuations
- Easier budgeting - Great for first-time buyers or tight budgets
Cons of Fixed Rates
- Higher initial rates - Usually 0.5-1% higher than variable rates
- No benefit from rate drops - If rates fall, you're locked in
- Expensive penalties - Breaking your mortgage early can cost thousands (IRD penalty)
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 prime rate changes, so does your mortgage rate and potentially your payment amount.
Pros of Variable Rates
- Lower initial rates - Start with rates 0.5-1% lower than fixed
- Benefit from rate decreases - Save money when rates drop
- Lower penalties - Breaking early costs just 3 months' interest
- Historical savings - Historically, variable has saved more over time
Cons of Variable Rates
- Payment uncertainty - Your payment can increase if rates rise
- Budgeting challenges - Harder to plan with changing payments
- Stress factor - Market volatility can cause anxiety
Side-by-Side Comparison
| Factor | Fixed Rate | Variable Rate |
|---|---|---|
| Current Rate (2026) | 5.5% - 6.5% | 4.8% - 5.8% |
| Payment Stability | ✓ Guaranteed | ✗ Varies |
| Break Penalty | High (IRD) | Low (3 months) |
| Best For | Risk-averse, tight budgets | Risk-tolerant, flexible budgets |
| Market Outlook Impact | Protected from increases | Benefits from decreases |
Which Should You Choose?
Choose Fixed Rate If...
- • You're a first-time buyer with a tight budget
- • You prioritize payment certainty and peace of mind
- • You believe interest rates will rise significantly
- • You can't afford payment increases
- • You plan to stay in the home long-term
Choose Variable Rate If...
- • You have financial flexibility and emergency savings
- • You're comfortable with some uncertainty
- • You believe rates will decrease or stay stable
- • You might sell or refinance within 3-5 years
- • You want to take advantage of lower initial rates
Expert Tip: The Hybrid Approach
Can't decide? Consider splitting your mortgage! Some lenders allow you to put part of your mortgage at a fixed rate and part at a variable rate. This gives you a balance of stability and savings potential.
Talk to a mortgage broker (like the ones at Loan Lizard) to explore this option and find the perfect strategy for your situation.