Fixed or Variable Mortgage Rates

Before getting a mortgage, homebuyers have to choose a mortgage rate: variable or fixed.

Fixed rate mortgages

  • For the term of your mortgage, your rate and monthly payment will stay the same.
  • Fixed rates are easier to manage, as you know you’ll be paying the same amount for each payment.
  • If there is a noticeable difference between the fixed and variable rates, the stability of a fixed rate is likely not worth the premium over a variable rate.

Historical Fixed Rate Mortgage Rates can be viewed here

Variable rate mortgages

  • A variable mortgage rate changes with the prime lending rate, which is set by your lender. Variable rates are stated as “Prime + or -” a certain amount—as in Prime +1.00%. Although the prime rate fluctuates, the relationship to prime remains the same over the term.
  • Variable rates have been proven to be less expensive over time.
  • If prime increases, so does your interest payable, and these fluctuations can be stressful for some homebuyers.

Historical Variable Rate Mortgages can be viewed here

Zoo Tip!

66% of homebuyers opt for fixed mortgage rates. 4% of mortgage rates are a combination or hybrid rate, meaning they have both a variable and fixed component.

How to choose between fixed and variable mortgage rates

There are a number of scenarios that can help you decide between a fixed-rate and a variable-rate mortgage.

  • If interest rates are low and are unlikely to fall further, you may be best to lock in a fixed rate, as variable rates will likely increase with prime. If you’re close to your maximum affordability and could not cover an interest rate hike, you should lock in your rate for as long as possible.
  • If you (or your broker) believe interest rates will fall, a variable rate would be a better bet, as you can reap the benefits of the lower rate during your term.

Popularity of mortgage by type

Mortgage Type 18 - 34 35 - 54 55+ Total
Fixed-Rate 67% 67% 62% 66%
Variable-Rate 25% 27% 28% 26%
Combination 8% 6% 10% 8%

What causes changes in the prime rate?

The Bank of Canada (BoC) assesses the state of the economy, based on a number of economic factors from unemployment and export to manufacturing, and adjusts the prime rate accordingly.

When inflation is high, the BoC will likely increase the prime rate to make borrowing money more expensive. Alternatively, when inflation is low, the prime rate is lowered to attract consumers to borrow money and stimulate the economy.

Mortgage lenders set their own discounts or premiums on the prime rate, which is then applied to variable rates, based on their desired market share, competition, strategy, and credit conditions. All of these factors also add to the gap between fixed mortgage rates and bond yields.