Fixed or Variable? High Stakes for Homeowners

Date Posted: October 11, 2023

Choosing between a fixed or variable-rate mortgage has become a high-stakes decision as interest rates sit at historic lows. While variable-rate mortgages lost favor due to Bank of Canada interest rate hikes, fixed-rate mortgages have also risen from pandemic lows. Some borrowers still opt for variable rates, believing that rates have peaked and are comfortable with their payments. Variable rates often have less severe penalties for early loan termination.

Frank Napolitano, co-founder and mortgage agent at Mortgage Brokers Ottawa, said he's still seeing some borrowers opt for a variable rate, even noting that a recent client who was struggling with a variable-rate mortgage chose to stick with it after consolidating some other debt and extending the amortization period.

"He's decided he's going to go variable only because he believes that the rates are now probably at the peak and the payment that's been set up for him at 25 years is something that he's very comfortable with," Napolitano said.

"He's hoping that with so many people struggling that the interest rates are going to come down and then he will consider locking it in, but he wants rates to come down a little bit before (then)."

Napolitano adds that variable rate mortgages generally have less onerous penalties than fixed-rate options if you have to get out of your loan early.

Traditionally, variable rates were slightly lower than fixed ones, but now, five-year variable-rate mortgages are often more expensive. This means that variable-rate borrowers need Canada's central bank to lower prime rates for savings. The Bank of Canada recently kept its key rate steady but signaled future increases to combat inflation.

Variable-rate borrowers must be prepared for potential rate hikes and consider higher monthly payments or longer loan terms. Converting a variable-rate mortgage to a fixed one may incur penalties. Fixed rates offer stability but are currently at their highest in years.

To make the right choice, start by examining your budget and actual expenses. Many Canadians are shifting back to fixed-rate mortgages for monthly stability. Some are opting for shorter terms, hoping rates will fall in the future. Seek personalized advice from financial professionals to match the loan with your unique situation, goals, and life stage.

Have questions about your mortgage? Contact a mortgage broker today.