Two people can be handed identical mortgage offers, take opposite terms, and both be right. Fixed versus variable is not a forecast, it is a question about your own tolerance and your own next five years.
What each one actually is
A fixed rate stays the same for your whole term. Your payment does not move regardless of what the Bank of Canada does.
A variable rate moves with your lender’s prime rate, which follows the overnight rate. On most variable products the payment stays level and the split between principal and interest shifts. On adjustable products the payment itself changes.
Ask which one you are being offered, because people use the words interchangeably and they behave differently.
The case for variable
Historically variable has cost less over full terms more often than not. It also carries the gentler penalty, typically three months interest, which matters given how many people break a mortgage early.
Variable suits you if your income is stable, you have a cushion, and a payment that moves will not keep you awake.
The case for fixed
Certainty has value that does not appear in a spreadsheet. If you are stretching to buy, if your income varies, or if you know a rate change would genuinely worry you, fixed is worth paying for.
The five year fixed is the most chosen product in Canada by a wide margin, and that is not because everyone is being timid. It is because most households would rather budget than optimise.
The middle options
Shorter fixed terms, two or three years, let you take certainty now without locking in for half a decade. They usually price a little above the five year and they give you an earlier off-ramp.
Some lenders offer a hybrid, part fixed and part variable. It splits the difference and it complicates any future move, so read the terms before you find it clever.
The question I actually ask
Not what will rates do. Nobody knows, and anyone speaking with confidence about it is guessing in a nice voice.
What I ask is this. If your payment rose by 300 dollars next quarter, what would you cut? If you answer easily, variable is fine. If you go quiet, take the fixed and sleep.
The best mortgage is the one you can live with when things do not go the way anyone predicted.
If you are weighing this up for a purchase or a renewal, would it help to talk it through against your actual numbers?
General education, not financial advice. Figures are illustrative and subject to lender approval (O.A.C.). Lora Fenn, Mortgage Agent Level 1, Lic. #M25003153. Dominion Lending Centres YBM Group, FSRA #11129. 705-881-2780 · lfenn@dominionlending.ca
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