Fixed vs Variable Rate: Which Is Right for You?
固定利率 vs 浮动利率：哪个适合您？
The fixed vs. variable debate is one of the most common questions I get. There's no universally right answer—it depends on your situation, risk tolerance, and what the rate environment looks like.
The Short Answer
- Choose fixed if you value predictability, have a tight budget, or are anxious about rate changes
- Choose variable if you can stomach short-term uncertainty, have financial flexibility, and are comfortable with rates moving
Fixed Rate: Stability at a Price
How it works
Your rate is set for the entire term (typically 5 years). Your payment stays the same regardless of what the Bank of Canada does.
Pros
- Predictable payments: You know exactly what you'll pay each month
- Protection from rate hikes: If the BoC raises rates 3 times next year, you're unaffected
- Peace of mind: Easier to budget, especially for first-time buyers
Cons
- Higher starting rate: You pay a premium for certainty
- Expensive to break: IRD penalties can be enormous mid-term
- Misses rate drops: If rates fall, you're stuck at your higher rate until renewal
Variable Rate: Flexibility with Uncertainty
How it works
Your rate moves with the Bank of Canada's overnight rate. Typically expressed as prime ± a spread (e.g., prime – 0.75%).
There are two types:
- Adjustable-rate mortgage (ARM): Your payment changes as rates change
- Variable-rate mortgage (VRM): Payment stays fixed, but the split between principal and interest changes
Pros
- Usually lower at signing: Variable rates are historically lower than fixed
- Low break penalty: Just 3 months' interest
- Historically better performance: Studies show variable rate holders have paid less interest over time
Cons
- Rate risk: If the BoC raises rates significantly, your payment or amortization increases
- Psychological stress: Watching rate announcements every 6 weeks is not everyone's idea of fun
- Qualifying: You still qualify at the stress test rate regardless
Historical Perspective
Looking at data from the past 30 years, variable rate mortgages have generally outperformed fixed rate mortgages—meaning borrowers paid less total interest. However, this trend reversed sharply in 2022–2023 when the Bank of Canada raised rates from 0.25% to 5.0% in 18 months, catching many variable rate holders off guard.
The lesson: past performance doesn't guarantee future results.
How to Choose: A Framework
Ask yourself these questions:
1. Can you afford your payment if your rate rose by 2%? If not, fixed may be safer.
2. How long do you plan to stay in this home? If you might sell in 2–3 years, the variable penalty advantage matters more.
3. What does your emergency fund look like? Variable rate works better with 3–6 months of expenses saved.
4. What's the current rate environment? When rates are at historical highs, variable has more room to fall (positive). When rates are at historic lows, variable has more room to rise (negative).
5. How would you feel if your payment went up $300/month? Be honest with yourself.
A Common Hybrid Approach
Some borrowers split their mortgage—50% fixed, 50% variable—to hedge between the two options. This isn't available with all lenders but can be a useful middle ground.
The right choice depends on your personal situation. Book a free consultation and I'll help you think through what makes sense for you specifically.