The fixed-versus-variable question usually gets answered with a rate forecast. That is the least reliable input available. A better approach is to ignore prediction entirely and assess three things you genuinely know about your own situation.
How each one actually works
Fixed
Your interest rate is locked for the term. The payment does not move, and the split between principal and interest follows a schedule set at the start. You are buying certainty, and you generally pay a small premium for it.
Variable
Your rate moves with the lender's prime rate. Two structures exist, and the difference matters:
- Variable rate, fixed payment — the payment stays level; when prime rises, more of it goes to interest and less to principal. Push far enough and you hit your trigger rate, where the payment no longer covers interest at all.
- Adjustable rate — the payment itself moves with prime. Your amortisation stays on track, but your budget absorbs the swings.
Ask which one you are being offered. They are frequently both described simply as "variable".
The three questions that decide it
1. How much headroom is in your budget?
If a two-point rate rise would genuinely strain you, that is a strong argument for fixed regardless of any forecast. Certainty has real value when the alternative is stress.
2. How likely are you to break the mortgage early?
This is the question most people skip, and it is often the most expensive one. Penalties differ enormously:
- Variable — typically three months' interest. Predictable and comparatively modest.
- Fixed — the greater of three months' interest or the interest rate differential (IRD). The IRD can be many times larger, particularly early in a term taken at a high rate.
If there is a realistic chance of selling, relocating or refinancing mid-term, the penalty structure can outweigh a small rate advantage.
3. How long is your horizon?
Buying a starter home you expect to outgrow in three years is a different problem from settling into a long-term family home. Shorter horizons favour flexibility; longer ones favour locking in a rate you can live with.
The options in between
The choice is not strictly binary:
- Shorter fixed terms — a two- or three-year fixed gives certainty without committing for five years.
- Convertible variable — many variable products let you convert to a fixed term without penalty. Confirm the conversion terms before you rely on this.
- Hybrid mortgages — part fixed, part variable. Fewer lenders offer these and they complicate a future switch, but they can suit a specific situation.
What to compare beyond the rate
Two mortgages at the same rate are not the same mortgage. Check:
- How the prepayment privileges work — the percentage, and whether lump sums are restricted to anniversary dates
- Whether the mortgage is portable if you move
- How the penalty is calculated, in writing
- Whether it is a collateral charge, which can make switching lenders at renewal more costly
Figures in this article are illustrative and calculated using Canadian semi-annual compounding. Rates shown are examples, not offers. Government programme thresholds and insurance premiums are revised periodically — confirm current numbers before making a decision.
Want the comparison run against your actual numbers? Book a free consultation.
Written by Site Administrator
