Variable vs Fixed Mortgage Rates: Features Compared

The short video below will clarify the differences between variable and fixed mortgage rates and provide a good basis for our discussion.

To summarize:

Fixed Rate:

• Locks your rate into place for a period of time called the term (usually 1,2,3,4 or 5 years).
• Rate is typically a bit higher, but provides for a stable, consistent mortgage payment for years to come.
• If you break the mortgage, there is often a bigger penalty called an ‘Interest Rate Differential’ penalty.
• Switching from a fixed rate to a variable rate without breaking the mortgage is impossible.

Variable Rate:

• The rate floats or changes over time, with decisions from the Central Bank of Canada.
• The rate is determined using a discount off of the Prime Rate (ex. Prime minus .50%).
• Typically, the variable rate is lower than fixed, but can also float higher for periods. 
• If you break the mortgage, the penalty is typically far lower.
• You can lock the variable rate into a fixed rate at any time, without breaking the mortgage.

Should you take a variable rate? 4 reasons why a variable rate could lead to more savings in 2026 and beyond

1. Variable is Historically and Statistically Shown to Cost Less than Fixed

According to a 2001 report completed by Moshe Milevsky, Professor of Finance at York University Schulich School of Business, variable mortgage rates beat 5 year fixed rates 70% – 90% of the time. 

Using data from 1950 – 2000, the study includes a period of high market volatility in the 1980s and 1990s when mortgage rates were much higher than they are at present, not unlike what we are witnessing in 2022 – 2024. This means that the data used in this study were not selected during a period that would have manipulated the results to favour a variable rate over a fixed rate. 

I believe it’s quite the opposite. I believe that the volatility in rates in the 1980s and 1990s, and more recently in 2022 and 2023, skews the argument toward fixed rates, and that it is more likely for rates to remain lower over the long term than higher rates seen during periods of peak inflation. 

With this said, in the author’s words “When interest rates are at low levels, one is better off locking in at long term rates”.

To summarize, the author of the study suggests that variable rates are the better choice much of the time, but locking into a fixed-rate mortgage at the right time can result in mortgage rate savings. We will address the variable rate lock in feature, later in this article. 

Some will point to higher interest rates during the 1980s and 1990s, and to the more recent 2022/2023 rate increases, as reasons to avoid a variable rate. This thinking is understandable, however, as we will review below, we live in a very different economy now. And public debt continues to accumulate (at a time of ‘record budget deficits’), the weight that high interest rates have becomes even greater.

2. Higher Government and Personal Debt Levels Keep Rates Lower

Today’s national and Global economy relies upon a perpetually increasing amount of debt.  Already massive Government debt isn’t just increasing; it’s increasing at an exponential rate, and it’s looking less and less likely that it’s possible to turn this ship around without a more fundamental change in the system altogether. So we can likely expect this debt accumulation to continue for the foreseeable future.

How does this relate to mortgage variable rates?

Specifically, since debt levels, including personal household debt and mortgage sizes, are generally 6x (and increasing), higher than they were in the 1970s and 1980s, the effects of a 1% higher Central Bank rate have approximately 6 times the economic impact as a 1% higher rate did in the 1980s. 

For example, a single family house in the 1970s and 1980s may have cost $50,000 with a $40,000 mortgage.  Today, an average house in Canada costs well over $600,000, with many mortgages over $500,000. In the GVA and GTA, these numbers are even higher.

These are different economic times, with different consequences of higher rates.

Therefore, even with 8% inflation in 2022, we did not see the high 15%+ rates seen in the 1980s and 1990s. Variable mortgage rates mostly peaked in the 6% range for 8 months, until rates ultimately moved lower into the mid 3% range in 2025, as inflation was subdued.

As debt levels increase, the effects of higher rates become even more powerful. Accordingly, this is more likely to limit how high the Bank of Canada will increase rates in the future, even if higher inflation returns.

3. Economic Stagnation in Canada Keeps Rates Lower

It’s no secret to most Canadians that the economy is weakening, and economic pressures are building. Employment levels are teetering, and US trade conflicts are not helping with corporate investment in Canada.  GDP/economic growth continues to be revised downwards, and there is no real, fundamental catalyst in sight to spur economic growth in Canada.

The result of this economic softness is that the Bank of Canada will need to stimulate the economy with lower interest rates.

If interest rates are higher, this absorbs money in the economy and reduces spending. When the BoC lowers rates, this frees up household cash flow and creates additional incentives to borrow, spend, and invest.

Generally speaking, we are in an era where lower rates are chronically needed to sustain the economy, which bodes well for low variable mortgage rates. This isn’t to say there won’t be inflationary trends and BoC rate fluctuations, but that these fluctuations will be within a lower range.

4. Long Term Deflation 

One of the biggest forces in the economy is technological change. The rate of change from technology is increasing, faster and faster, to an extent that it’s hard to keep up. Ultimately, new technology increases economic productivity. This means fewer employees can do more. Fewer resources are needed for improved results. The effects of this massive trend are deflationary, putting upward pressure on the value of the dollar – not devaluing the dollar as inflation does.

The result of deflation and a stronger dollar is – you guessed it – lower interest rates.

This isn’t to say that the effects of inflation won’t be persistent. There are several reasons inflation will hang around: Deglobalization, geopolitical instability, massive money printing and government deficit spending, a weakening of the US dollar relative to other global currencies (pulling the highly correlated Canadian dollar down with it).

The argument here is that the effects of technology and deflation will, to a large part, offset inflation over the longer term. This isn’t to say you’ll notice major effects of deflation in a day or a month, or even a year. But there is a long-term deflationary theme at play, and this will also help keep interest rates, and more specifically the variable mortgage rate in Canada, lower.

How to minimize the risk associated with a variable-rate mortgage

Here, we revisit the fundamental question of why we are even discussing a fixed- or variable-rate mortgage. The answer for most is to save more money on their mortgage, in one way or another. 

The strategy here shows you how to lower your risk on a variable mortgage while helping you save substantially on interest over time.

I call this more specifically, ‘variable rate risk mitigation’ and it involves keeping variable rate mortgage payments higher, and equivalent to today’s 5-year fixed rates. In other words, because the variable mortgage rate is lower, and this results in a lower payment, you can use mortgage pre-payment privileges to increase the variable rate payment to the equivalent of a current fixed mortgage rate payment.

The result is that you are taking advantage of the lower variable rate to repay the mortgage principal faster, and because you have less mortgage over time, this reduces your risk. If rates increase in the future, you will have gotten ahead, saved on interest and lessened the effect of the potentially higher future rates.

For example:

In the above example, the difference between variable and fixed mortgage payments is $114 per month.

So you would use the pre payment privileges in your mortgage to pay an extra $114 per month in principal payment to pay down your mortgage faster.

This additional principal payment would reduce your mortgage balance much faster, increase your net worth, and substantially reduce future interest payments.  It would mitigate variable-rate risk.

Variable Rate Payment Shock Protection

You could consider an even higher variable mortgage rate to accelerate amortization and further mitigate risk. It does not have to be based on comparable fixed rates. For example, you could base the payment on a higher posted bank rate closer to 5%. This would also protect you from a ‘what if rates increase’ scenario. If rates moved higher a few years out, you could reduce your prepayments, thereby protecting you from payment shock.

For your personalized risk mitigation analysis on fixed vs. variable rates, connect with Altrua Financial.

Note: For ‘true’ variable mortgages, the payment will not drop when the rates drop. Instead, a request would be made to the Bank to reduce the payment along with the rate. Many mortgages are ‘adjustable rate mortgages’ where the payment rises and falls automatically with changes in the rate. So those with adjustable rate mortgages would need to be more proactive with the prepayment, unlike the true variable, which will remain higher in accordance with this planning.

How variable rates offer more flexibility and lower penalties than fixed rates

Closely related to lowering risk, as emphasized in the last point, are the lower penalties and increased flexibility built into a variable rate mortgage. Specifically, most variable mortgage rates only ever charge a 3 month interest penalty to break. These features are a cornerstone of a variable rate.

Even though the rate itself is not as predictable looking out over the term, the penalty required if the mortgage is brokered is predictable because it’s only ever a 3-month interest penalty.

This is in contrast to a 5-year fixed mortgage, which can easily result in a penalty in $10,000 + range if the mortgage is broken during the term. Especially if mortgage rates drop in the market,.

In fact, some mortgage and financial professionals go as far as to say the lower variable rate penalty is the main benefit of a variable rate mortgage, given how fixed-rate breakage penalties 

So when looking at the variable vs. fixed mortgage debate, it’s essential to consider that, especially during the first 3 years of a 5-year fixed-rate mortgage, the penalty for breaking the mortgage can be extremely high.

As a mortgage broker for over 17 years, I have seen many individuals faced with massive ‘interest rate differential penalties’, when breaking their fixed rate mortgage for any number of reasons:

• Moving
• Refinancing to pull out equity
• Switching into a lower rate
• Family changes
• Many more…

This trend was especially the case in 2020-2021 as many who are in a fixed-rate mortgage in the mid-high 3% range were faced with cost-prohibitive penalties in the $10,000’s to break their higher-rate mortgage, when mortgage rates fell to the 2% range.

This happened again in 2023-2024 when mortgage rates fell from the mid 5% range, down to the mid 3% range where they are today.

This was not the case for those in a variable rate mortgage, and this kind of variable rate flexibility could certainly come into play again in 2026-2027 if  fixed rates decrease more than expected.

While a detailed discussion of penalty details is beyond the scope of this article, the point is that most variable rate mortgages (the mortgage products without high penalty fine print) will only ever charge 3 months interest penalty if you end up breaking the mortgage. The 3 month interest penalty is far lower – often to the tune of thousands of dollars lower than comparable fixed rate mortgage penalties.

A five-year standard fixed-rate mortgage term is a long time, and it can be difficult to predict precisely how the economy and financial markets will play out years into the future. An essential financial planning strategy is to remain flexible and agile to accommodate changes. 

The variable-rate mortgage is, in many cases, the right financial tool to accommodate these potential changes while minimizing associated risks.

Is it time to lock into a fixed mortgage rate?

 One of the fundamental benefits of a variable rate is the ability to lock into a fixed rate.

At the beginning of the article we discussed an academic study by Moshe Milevsky that saw variable rates saving homeowners a majority of the time, however there were times in the interest rate cycle that a fixed rate would have been better. 

Few can accurately time the market, however, when the economy is soft and rates are lowered to stimulate the soft economy, this may be a sign that mortgage rates (fixed and variable rates) are closer to their low point in the cycle.

Buy high…  the variable rate  

Sell low… the variable rate

If mortgage rates temporarily dip to the low to mid 3% range, for example, you could lock in the variable rate to a fixed rate at a time when rates are lower.

Current Mortgage Market Trends Affecting Variable Rate Locking

Currently, the Bank of Canada has signalled that we are at a market bottom. The financial market odds also point to a rate pause. However, that does not rule out the possibility of further cuts. Instead of basing the decision solely on mortgage rate forecasts in Canada, let’s consider a more personalized risk tolerance approach.

Fixed or Variable Mortgage Rate Decision Framework

Let’s pause interest rate forecasting for a moment and review the decision between fixed and variable mortgage rates from a risk-based perspective.

To do this, we use a framework that helps you determine, based on your personal risk tolerance and comfort levels, whether it’s better to select a fixed mortgage rate. Or if you already have a variable rate, is it a good time to lock it into a fixed rate?

Financially Conservative/ Rate Sensitive: Should consider locking in a 5 year fixed rate. Even though fixed rates are higher, they are not too much higher. And it’s hard to put a price on a good nights sleep.

Financially Bold/ High Rate Tolerance: Should consider floating with a variable. It’s possible rates drop further from here as the economy evolves, and new headlines emerge. With a higher cash flow relative to mortgage payments, additional mortgage pre-payments to repay the mortgage and reduce mortgage balance exposure, and more market-based investing, there is an enhanced opportunity to mitigate risk.

Somewhere in the middle/Balanced risk tolerance: Sleep on it for a few nights.  You may consider a 3-year fixed rate, which offers more flexibility than a 5-year fixed because you can break the term sooner with a lower prepayment penalty (if rates drop), or on renewal, potentially renew into a lower rate. However, you still have 3 years of payment predictability and consistency if rates happen to increase.

Or if you lean towards variable, again have a really solid risk mitigation plan (pre-payment plan) based on a higher fixed rate, such as a 5% rate. This will help repay the principal faster and reduce the risk of a payment shock if rates are higher in the future.

Variable Vs Fixed Rate Survey: Questions to Help You Decide

• Do you have a good understanding of how the variable rate works and how swings in the rate can affect your mortgage payment?

• If you were to buy an investment, such as an ETF or mutual fund, would it be:
  • Conservative? (low risk, more stable, lower potential return). Consider a 5 year fixed mortgage rate.
  • Balanced? (moderate risk, more volatile, but more opportunity for higher returns). Consider a variable with a good risk mitigation strategy
  • Growth? (more risk, the maximum opportunity for a higher return.) Consider a variable mortgage rate.
  • If you’re still unsure of what investment category you’d fit into, try searching for an investment risk profile to see where you might end up.

• Are you comfortable if the variable rate increases slightly higher, and could potentially increase further than projected?

• Do you have some excess or can you create excess cash flow to manage higher variable rate payments? Or would potentially higher variable rates put you in a highly uncomfortable or dangerous financial position?

• Have you calculated what your maximum tolerable mortgage payment can be? What kind of variable rate would this look like? Are you comfortable with this rate?

 Importantly, the decision should not be made based on the day’s positive or negative news. News is designed to swing your emotions and is reactive. We encourage a proactive approach to rate selection.

If youre already in a Variable Rate: How to lock a variable into a fixed mortgage rate

This involves simply calling the lender and requesting the lock in. No additional documents are required as long as payments are up to date.

If you are looking to lock in your variable rate, and if you see a much better deal at a different lender that the current lender is not willing or able to match, since the variable mortgage rate penalty is relatively lower (typically 3 months interest penalty), it can make sense to pay the penalty to switch lenders for the lower rate. The fact that mortgage holders can do this tends to keep lenders a bit more honest in fixed rate lock in offerings (but unfortunately, not always…). 

Thank you for reading, and connect with Altrua Financial for answers to your questions and a customized rate strategy.