Fixed vs. Variable Mortgages: Full Comparison

This Page's Content Was Last Updated: September 07, 2022
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What You Should Know

  • Variable rates are usually lower than fixed rates and feature lower prepayment penalties, but there is the risk of your interest rate increasing during your term.
  • Fixed rates provide stability with pre-determined mortgage payments, however, they have higher prepayment penalties and higher rates when compared to variable mortgages.
  • Borrowers with a variable-rate mortgage will benefit if interest rates go down, while those that are locked into a fixed rate will benefit if interest rates go up.
  • Some lenders let you convert a variable-rate mortgage to a fixed rate, or even combine a fixed rate and a variable rate into a hybrid mortgage.

Fixed-rate mortgages have an interest rate that does not change for the length of your mortgage term. Having your mortgage rate set ahead of time allows for you to not have to worry about mortgage rates until your mortgage is up for renewal again. However, fixed rates are usually higher than variable rates.

fixed vs variable mortgages

If you’re comfortable with uncertainty in future mortgage rates, a variable rate mortgage can save you money if interest rates stay the same or fall in the future. You can still save money with a variable rate mortgage if interest rates rise slightly in the future.

For example, you might be offered a fixed-rate mortgage at 3% or a variable-rate mortgage at 2%. If your variable-rate stays at 2% and then increases to 3% in three years and 4% in four years, you may still be saving money with a variable rate. You would have two years where you would be benefiting from a rate that is 1% lower than the fixed-rate offered. This extra interest savings may offset the one year where your variable rate is 1% higher than the fixed rate.

Another key benefit of variable rate mortgages is their lower mortgage penalties. With a variable rate, mortgage prepayment penalties will generally only be three months' of interest. For fixed mortgages, the penalties can be significantly higher using an interest rate differential.

Fixed Ratesv.sVariable Rates
  • Benefits if interest rates go up
  • Does not benefit if interest rates go down
  • High mortgage prepayment penalties
  • Higher initial rate
  • Peace of mind and stability
  • Cannot be converted to a variable rate
  • Does not benefit if interest rates go up
  • Benefits if interest rates go down
  • Low mortgage prepayment penalties
  • Lower initial rate
  • Risky and creates uncertainty
  • Can be converted to a fixed rate

Fixed vs Variable Mortgage Statistics

Market Share of Variable Rate Mortgages (New Loans)

Source: Statistics Canada

Market Share of Variable Rate Mortgages (Outstanding)

Source: Statistics Canada

Fixed (5-Year) vs Variable Mortgage Rates

Source: Statistics Canada

Variable Rate Mortgage Strategy

You can reduce the risk of a variable rate mortgage and possibly pay off your mortgage faster by treating your mortgage like a fixed rate mortgage. You can use the interest savings from a lower variable rate to make mortgage prepayments, or you can save them to use in the event that variable rates increase. This helps protect you from increases in variable rates by storing up savings from the beginning of your term.

For example, let's look at a $500,000 mortgage with a 25-year amortization and monthly mortgage payments. You're looking to get a mortgage for a 5-year term.

You decide to get a 5-year variable rate mortgage with a rate of 1.50%. This means that your monthly payments will be $2,000. The best fixed mortgage rate offered at the time is 2.50%. If you had gotten a fixed rate mortgage instead, your monthly payments would have been $2,240.

With a variable mortgage rate, your monthly payments are currently $240 lower every month. You can use this for mortgage prepayments, which can be used to increase your monthly payments to $2,240, so that you'll be paying off your mortgage faster and sooner. You can also use the savings for other uses, such as to pay high-interest debt.

Variable Mortgage with Fixed Mortgage Payments

Most banks offer variable mortgage payments that are fixed, even if your variable rate changes. For homeowners that want certainty in their monthly mortgage payments, a variable-rate mortgage with fixed payments means that their day-to-day budget won’t be impacted if interest rates rise. Instead, a larger portion of your regular mortgage payment will shift from paying down your principal to covering your interest cost.

If variable rates decrease, you'll be paying more towards your principal, which means that you are paying off your mortgage faster. If variable rates increase, you’ll be paying your mortgage slower, which will cause your mortgage amortization to temporarily be longer. For CMHC-insured mortgages with a maximum allowed amortization of 25 years, your variable rate mortgage still needs to be within this limit. If you have just recently signed a variable mortgage, and your mortgage amortization temporarily becomes longer than 25 years due to a rise in variable rates, then you will need to be put back on track. Once your mortgage term is over and you renew your mortgage, you will need to make larger mortgage payments to pay off your mortgage on schedule.

While fixed mortgage payments offer certainty for your budgeting, it’s still not guaranteed that they will remain fixed. Your regular mortgage payments still need to be enough to cover your mortgage interest. If variable rates rise significantly, and your mortgage payment doesn't cover your mortgage interest, then your fixed mortgage payment will need to be increased.

To see how this works, let's consider a $2,000 monthly mortgage payment that has $1,000 going towards your mortgage principal and $1,000 will go towards interest. Suppose variable mortgage rates rise significantly to the point where $2,000 will go towards interest. That leaves $0 for your principal payment, if your monthly mortgage payment stays the same at $2,000. If variable rates rise any further, in this case a rise that pushes your monthly interest over $2,000, then your monthly mortgage payment will also increase.

Once your variable term is over, you will need to accelerate your amortization by increasing the size of your mortgage payments for your subsequent mortgage term to make up for the principal that you did not repay as scheduled.

Capped Variable Rates

A capped variable rate is the maximum interest rate that your variable rate can be during your term. The main advantage of a capped variable mortgage is that it protects you from sharp increases in interest rates. Going with a capped variable-rate mortgage will mean that your variable rate will be higher than with an uncapped variable-rate mortgage, but you’re protected from large increases in rates through your mortgage’s maximum interest rate cap.

For example, a mortgage lender might offer a 5-year variable mortgage rate of 4%, or a capped variable rate of 4.5% with a cap of 6%. This 6% maximum is effective for the length of the 5-year term. If variable rates increase to 7%, the capped variable-rate mortgage in this example would have an interest rate of just 6%.

Variable Mortgage with Variable Mortgage Payments

Having a variable mortgage payment with your variable rate mortgage means that your payments will fluctuate along with your mortgage rate. In Canada, this is also known as an adjustable rate mortgage (ARM).

Since adjustable rate mortgages have a mortgage payment that changes with your variable rate, your mortgage’s amortization won’t change even if your rate changes. This allows for your mortgage to be paid off on-time. However, changing mortgage payment requirements can make it difficult to budget for, as rapidly rising variable rates may cause your mortgage payments to increase significantly.

Scotiabank is one of the few major banks in Canada that offer variable mortgages with fluctuating mortgage payments. With Scotiabank, the Scotia Flex Value mortgage has a mortgage payment that changes every time your mortgage rate changes. If you don't want a changing mortgage payment, then the Scotia Ultimate Variable Rate mortgage allows you to have a fixed mortgage payment. Scotiabank only offers fixed mortgage payments for variable mortgages with a 3-year term. Scotiabank’s 5-year variable mortgage has a variable mortgage payment.

Adjustable-rate mortgages are more common at B-lenders and smaller mortgage lenders. Some lenders, such as CMLS, allow you to convert your adjustable-rate mortgage to a fixed-rate mortgage.

Canadian mortgage lenders that offer variable-rate or adjustable-rate mortgages with variable payments include:

ScotiabankNational BankEquitable Bank
ICICI BankTangerine Meridian Credit Union
Motusbank CMLS First National
MCAPHome Trust
Source: RateSpy

Hybrid Mortgages

For homeowners that can’t decide between a fixed rate or a variable rate, a hybrid mortgage allows you to have both. A hybrid mortgage, also known as a combination mortgage, combines a fixed rate portion with a variable rate portion to make up your mortgage.

The portions don't necessarily need to be 50% fixed and 50% variable either. Some hybrid mortgage lenders, such as Desjardins, allow you to have several portions with different terms, mortgage rate types, amortization, and payment frequency. For example, you can choose to have 30% of your mortgage being a variable rate with a 5-year term, and 70% of your mortgage having a fixed rate with a 3-year term.

Can I Change my Mortgage from Variable to Fixed?

Some mortgage lenders allow you to convert your variable rate mortgage to a fixed rate mortgage during your term. This allows you to lock in a fixed rate if you feel that interest rates will rise soon, but it’s too early for you to renew and switch to a fixed rate. It’s important to note that you won't be locking in your variable rate. Instead, you will receive the current fixed mortgage rate.

Your converted mortgage will also be for the remaining term length of your variable mortgage, not re-extended to match your original term. For example, converting a 5-year variable rate mortgage two years into your mortgage term will allow you to convert it to a 3-year fixed rate mortgage. Your locked-in mortgage rate will be the 3-year fixed rate offered by your lender. Your lender might also have conditions on when you can convert your mortgage rate. For example, CIBC only allows you to convert from a variable rate to a fixed rate with a term of three years or more.

It’s rare for mortgage lenders to allow you to switch from a fixed rate mortgage to a variable rate mortgage partway through your term without penalties. Once you’ve converted from a variable rate to a fixed rate, you won’t be able to switch back until the end of your term.

Should I Lock in a Fixed Mortgage Rate if Rates Decrease?

If you have a variable-rate mortgage and interest rates are currently low, you might be thinking about switching to a fixed-rate mortgage. One thing to keep in mind would be mortgage prepayment penalties. While they're usually just three months' worth of interest for a variable-rate mortgage, you’ll still need to keep this extra cost in mind.

Depending on your mortgage lender, you might be able to renew your mortgage early. This can be as far out as six months as some banks, such as Scotiabank and National Bank. Early mortgage renewals allow you to switch from a variable rate to a fixed rate at no extra cost within your early mortgage renewal period.

Once you’ve locked in a fixed mortgage rate, your payments will stay the same for the entire term, even if interest rates rise. This can save you a lot of money if rates go up during your term. However, if rates continue to decrease, you might have been better off with keeping your variable mortgage rate. Ultimately, it’s up to you to weigh the pros and cons of each type of mortgage rate to decide which is best for your situation.

How Much Lower are Variable Rates than Fixed Rates?

Comparing the best 5-year variable mortgage rate with the best 5-year fixed mortgage rate shows that the best variable rate is 0.80% lower than the best fixed rate as of August 2022. For Canada’s major banks, their variable rates can sometimes be 1.00% lower than their fixed rates. Historically, variable rates have been lower than fixed rates most of the time.

With rising mortgage rates in Canada, a lower variable rate can be a huge discount to your mortgage payments today. As of August 2022, BMO’s best 5-year fixed rate for an insured high-ratio mortgage was 5.24%, while BMO’s best 5-year variable rate was 4.24%. This makes the difference a full percentage point, but in terms of interest savings, the difference between a mortgage rate of 5.24% and 4.24% is 19%. In this case, choosing a variable mortgage rate with BMO over a fixed rate can reduce your mortgage interest by 19%.

However, rising rates will cause variable rates to increase while fixed rates will stay the same. It’s possible for variable rates to increase by over 1% in the near future, and that would eat up your savings. It may even cause you to pay more interest than you otherwise would have paid with a fixed mortgage rate.

Variable rates are also not always lower than fixed rates. In fact, there have been lengthy periods of time where variable rates have been higher than fixed mortgage rates. For example, average variable rates were higher than the average 5-year fixed rate for all of 2016, as well as from early 2019 to early 2020.

Why are Variable Rates Now Lower than Fixed Rates?

Economists at Canada’s major banks are predicting that interest rates and mortgage rates will rise over the next few years. In spite of the general expectation that rates will rise in the future, why are variable rates still lower than fixed rates?

One reason might be due to future expectations of where interest rates will go. Lenders think that there will be rate hikes by the Bank of Canada in the future, and so they will price variable rates low today in hopes of increasing them later. By driving borrowers towards low variable rates, lenders will be able to gain from rising variable rates, instead of having borrowers choose a fixed rate.

The opposite could also be seen in recent years. In early 2019, as Canada's economy slowed, there was a possibility of the Bank of Canada decreasing interest rates. This led to a reversal of the variable rate's usual discount to fixed rates. According to the CMHC, from March 2019 to February 2020, variable rates were priced at a premium to fixed rates. If interest rates were expected to fall, then lenders would want more borrowers with fixed rates while rates are still high, compared to a variable rate that would allow borrowers to enjoy lower rates.

A final thing to consider is what drives movements in fixed vs. variable mortgage rates. Variable mortgage rates are driven by Bank of Canada rate changes, which influence prime rates at Canadian banks. Meanwhile, fixed mortgage rates are largely driven by government bond yields, specifically the 5-year Government of Canada bond yield. It’s possible for bond yields to fall even as the Bank of Canada hikes rates. That might be the case if the markets expect future rate cuts.

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