Fixed vs. Variable Rate Mortgages: Stop Asking Where Rates Are Going
If I had a dollar for every time a client asked me, "Matt, do you think rates are going up or down?" — I'd be writing this from a beach somewhere. It's the most common question I hear, and I understand why people ask it. Nobody wants to lock into a 5-year fixed rate the week before rates drop, and nobody wants to ride a variable rate up the moment they sign.
Here's the truth: nobody knows where rates are going. Not me, not the bank economists, not the talking heads on TV. So instead of trying to predict the future, I tell my clients to focus on something we can control — the features of each product and which one actually fits their life.
Neither product is better than the other. They're different tools for different situations. Let's break them down.
Fixed Rate Mortgages: The "Set It and Forget It" Option
A fixed rate mortgage does exactly what the name suggests. You agree on a rate, you agree on a term (5 years is the most common in Canada), and your payment doesn't budge. Rates can climb 3% or fall 3% — your monthly payment stays exactly the same.
For a lot of clients, this is the right call. If you're a first-time buyer stretching to qualify, a young family on a tight budget, or someone who simply doesn't want to think about their mortgage every time the Bank of Canada makes an announcement, the peace of mind is worth a lot. You sign it, you forget it, you live your life.
The downside? Penalties.
If you need to break a fixed mortgage mid-term, the penalty can be brutal. We're talking the greater of three months' interest or the Interest Rate Differential (IRD). With most of the big banks, the IRD calculation can run into the tens of thousands of dollars depending on how much time is left on your term and how rates have moved.
When does this matter? More often than people think:
You sell your house and don't transfer the mortgage to a new property
Rates drop and you want to refinance to take advantage
You want to switch lenders mid-term for a better deal
Life happens — divorce, job relocation, a change in plans
If any of those feel like real possibilities for you over the next five years, that's worth weighing seriously before you sign a fixed rate.
Variable Rate Mortgages: The Flexibility Play
A variable rate moves with the Bank of Canada's prime rate. In exchange for accepting that movement, you get three real benefits that a lot of people don't know about:
1. The exit penalty is small and predictable. Break a variable rate mortgage at any time, for any reason, and the penalty is just three months' interest — no IRD, no surprises. You'll always know roughly what it will cost you to walk away.
2. You can convert to fixed, anytime, at no cost. If you get nervous about where rates are headed, you can lock into the going fixed rate. Usually you'll need to choose a term equal to or longer than what's left on your current mortgage, but the conversion itself doesn't cost you anything.
3. Historically, it tends to cost less over the long run. Looking at long stretches of Canadian mortgage history, variable rate holders have generally paid less total interest than those who locked into fixed — though "generally" isn't "always," which is exactly why this is a personal decision, not a formula.
Here's where it gets a little technical, and where I see the most confusion: there are actually two types of variable rate mortgages, and they behave very differently.
ARM vs. VIRM: Know Which One You're Getting
Adjustable Rate Mortgage (ARM): When the Bank of Canada changes rates, your payment changes with it. Rates go up, your payment goes up right away. Rates go down, your payment drops. It's the more "classic" variable rate.
Variable Interest Rate Mortgage (VIRM): Your payment stays static, even when the Bank of Canada moves. What changes behind the scenes is the mix between interest and principal. If rates rise, more of your payment goes to interest and less to principal — your amortization quietly stretches out. If rates fall, the opposite happens.
Neither is automatically better. An ARM gives you immediate cash flow relief when rates drop, but it also means real budget pressure when they rise. A VIRM protects your monthly budget from surprises, but you need to keep an eye on your amortization creeping longer if rates stay elevated for a while.
A Trick I Give Every Variable-Rate Client
If you go variable — especially a VIRM — here's a simple way to protect yourself from rate volatility: set your payment as if your rate were 1–2% higher than your actual minimum required payment.
That extra cushion does two things. It builds a buffer against future rate increases, so a hike doesn't catch your budget off guard. And every extra dollar goes straight to principal, so you're paying your mortgage down faster while rates are still working in your favour. It's a small habit that makes a variable rate feel a lot less volatile.
So Which One Is Right for You?
This isn't a question I can answer with a rate forecast, and honestly, anyone who tells you they know for certain where rates are headed is guessing. What I can do is walk through your specific situation — your budget, how likely you are to break the mortgage early, how much certainty you need versus how much flexibility you want — and help you land on the product that actually fits your life.
Fixed and variable are both good mortgages. The only bad choice is picking one without understanding what you're trading off.
If you'd like to talk through your options, let's book a call. I'll walk you through the numbers for your specific situation and help you decide with confidence — not guesswork.
Warm regards,
Mathieu Nesbitt