Fixed vs Variable Mortgages in Canada: 2022 Guide

There’s a learning curve to financing your home and plenty of dotted lines to sign before finalizing your mortgage. But finding the best suited mortgage for your financial outlook is a key ingredient to riding the rocky waves in the Canadian housing market right now. 

Mortgage interest rates have sat at an all-time low, but like any trend, they will fluctuate and go higher and peak in line with record-high inflation rates. And then eventually go down again.  Economists predict interest will rise throughout 2022, but in bite-size increments. Even with the Bank of Canada's recent announcement that they’ll maintain the policy rate (for now).

As a starting point to making your already-probably-pretty-tricky house hunt a little more tolerable, we’ve built this resource of information on mortgages. We’ll cover the difference between a fixed and variable mortgage, how the interest rate works in Canada and figure out which mortgage is your financial best friend.

What rising interest rates mean for variable and fixed mortgage rates in Canada

Raising interest rates makes it more expensive to borrow and typically cools off economic activity and price increases, which helps tame inflation.

What does inflation mean for interest rates in Canada right now? Interest rates are on their way up. And with that, it becomes pricier to borrow for a mortgage. Probably not what you want to hear, if you’re anything like the worried Canadians buckling down for economic roadblocks in 2022.

According to PolicyMe's Canadians and Money survey, 30 per cent of Canadians reported that they were worried about inflation. It’s predicted that inflation rates will stay at their elevated rate until 2023.

Currently, the Bank of Canada is holding their rates at 0.25 per cent, pressing pause on planned increases intended to control inflation, “a rate it adopted in a drastic drop in the early days of the [...] pandemic.” says Global News. But rate hikes are likely not far off.

The central bank’s overnight rate remains at 0.25 per cent, a rate it adopted in a drastic drop in the early days of the COVID-19 pandemic.

To put yourself in the best possible position to borrow for a mortgage, we’ve specced out some key considerations for prospective Canadian homebuyers. Here are some common scenarios and how to tackle them while rates are still budget-friendly:  

1. If you’re trying to decide between a fixed or variable mortgage, know that the right decision has a lot to do with your personality. 

Do you want to ride the ups and downs of a variable mortgage that fluctuates with the economy? 

Or do you want the reliability of a fixed mortgage that locks you into a rate for the life of your mortgage term? (Love a thrill ride? Choose variable. If you’re a control freak, fixed is going to feel way more comfortable). 

2. If you’re up for a mortgage renewal, try to lock it down ASAP.  

According to Angela Calla, a BC-based mortgage broker and author of The Mortgage Code

“If you or a loved one has a mortgage renewal in 2022 you will want to renew it in the first quarter of the year.” 

Why? Because rates are low right now and the Bank of Canada plans to hike rates later in the year – think as early as spring time. 

3. If you currently have a variable mortgage, consider getting an even cheaper variable mortgage. 

The headlines are clear: variable mortgages are usually cheaper than fixed mortgages right now. And currently, they’re a lot cheaper. 

When comparing the lowest rates available from the big five banks, a 5-year fixed rate is 2.75% compared to 1.25% for a variable rate.  

What is the difference between fixed and variable mortgages?

In today’s economic climate, the difference between a fixed and variable mortgage is about finding a match for your personality – and risk aversion. Let’s take a look at general break down of fixed mortgages and variable mortgages.

What is a fixed mortgage?

The interest rate of a fixed mortgage is locked in for the length of your term. More specifically, the amount of your payment never changes and how it’s divvied up towards paying your interest and principal stays exactly the same. 

You can choose between an open mortgage (that won’t financially ding you when you break a mortgage or pay it off early) or a closed mortgage that comes with a cost to breaking up before your term is over. 

What is a variable mortgage?

The interest rate of a variable mortgage or adjustable-rate mortgage (ARM), fluctuates with the prime rate which The Bank of Canada is in charge of establishing. While your payment doesn’t change, how it’s used will fluctuate.  

When interest rates go down, more of the payment is used to pay down the principal, and if rates go up, more of the payment is used to pay interest. 

There are pros and cons to both fixed mortgages and variable mortgages. A mortgage specialist can help guide you towards which option is the best fit for your budget, lifestyle and personality. 

Comparing fixed and variable mortgages

To round out this guide, we sat down with a mortgage expert at nesto to talk about the decision-making process. nesto is a mortgage solutions provider, dedicated to empowering people with a transparent property financing experience.

We sat down with Mortgage Advisor at nesto, Serge Lessard, to chat about considerations for choosing the right kind of mortgage:

“Deciding what type of mortgage to choose involves a thorough analysis of needs, objectives and risk tolerance. Focusing only on the best mortgage rate without looking at the big picture could turn into a nightmare.

Too often borrowers rely on the lender qualification criteria without considering their budget. Many expenses are not considered in a lender qualification therefore reviewing the family budget is an absolute must before deciding to move forward.”

For starters, it might helpful to ask yourself: do you want to ride the changing prime rate and move before your mortgage term is over? Then you might want to sign onto a variable mortgage.

Illustration with street signs reading "Fixed Mortgage Road" and "Variable Mortgage Road" for article about fixed vs variable mortgage

Here are some quick specs about variable mortgages:

  • It generally has a cheaper interest rate, however it’s at the whim of the changing prime rate established by The Bank of Canada.
  • How much of your mortgage payment pays for your principal versus your interest will fluctuate with the changing prime rate. The higher it goes, the less you will pay towards your principal because you will have more interest to pay for. 
  • It’s easier to break up with because the penalty fees are generally lower. 

Do you sweat the small stuff and don’t plan to move during your mortgage term? 

Then pick a fixed mortgage. Here’s what you need to know about fixed mortgages:

  • The interest rate is usually higher but it’s consistent. 
  • How much of your payment goes towards your mortgage principal and towards your interest never changes. 
  • It’s harder to break up with because the penalties fees are generally higher.

Here’s a quick snapshot of what to expect from each type of mortgage when it comes to interest and penalties:

Chart breaking down the differences between fixed vs variable mortgages

How do mortgage rates work?

Money is never free to borrow (lenders need to make money somehow, right?) and the same goes for your mortgage loan. 

And there’s nothing random about published interest rates. 

  • To establish fixed rates, banks keep their eye on bond yields. When the economy is humming along and inflation is low, bond yields are low and interest rates are lower. When the economy has hiccups and inflation is ticking up, bond yields are high and interest rates climb too. 
  • To establish variable rates, banks base them on the Bank of Canada’s prime rate, which the government uses to manage inflation. When the economy is strong, interest rates are high and when the economy is weak, interest rates are low. 

As of Q1 2021, the average outstanding mortgage balance is just over $250,000 in Canada. And the interest rate on these mortgages vary pretty widely, from 1.6-5.1%.

Infographic for fixed vs variable piece that reads: "The average mortgages outstanding as of Q1 2021 is: $258,410 with average interest rates of 1.6%-5.1%" average mortgages

Typical mortgage rates in Canada

With the average cost of a home in Canada clocking in at over $700,000, increasingly pricey homes are setting new mortgage trends.

According to our Canadians and Money survey, 61% of Canadian families seeking homeownership believe that there are not enough affordable options available, followed by 56% saying that they struggle to save enough for a down payment.

To get an idea of what the landscape of mortgages in Canada looks like right now, here are some highlights from the Canadian Mortgage and Housing Corporation’s latest residential mortgage industry report: 

  • Rock-bottom rates for a fixed mortgage have plateaued since Q1 2021
  • The average fixed mortgage rate was below 5% at 4.78%
  • In June 2021, the average variable mortgage rate was 59 basis points below the average fixed rate for uninsured mortgages with terms of 5 years or more
  • Because variable rates remain so much cheaper than fixed mortgage rates, over 40% of new mortgage balances issued in Q2 2021 have variable rates 
  • Only 13% of insured and uninsured mortgages were variable before the pandemic in February 2020
  • Borrowers are opting for longer terms so they can hold onto historically low rates

Comparing fixed and variable mortgage rates

It’s fair to say we’re collectively obsessed with paying off our mortgages sooner than later. In a consumer report by Mortgage Professionals Canada, it was found that the average amortization among Canadian mortgage holders is 20.6 years and the maximum amortization is 25 years. 

The question remains; which mortgage is better? It’s kind of like a chess match and here are some truths to help guide your next move: 

  • When interest rates are low and projected not to go lower, a fixed rate makes sense because variable rates will either stay the same or likely inch higher. 
  • If interest rates are projected to fall (when the big 5 banks are saying the same thing, you know it’s for real), then a variable mortgage is a better bet because your rate will fall with that lower interest that’s coming around the corner. 
  • If there’s a major difference between a fixed rate and a variable rate, crunch the numbers. The savings from a variable rate may win you over.  

To help give you an idea of how fixed and variable interest rates have fluctuated over the years, check out the graph below. 

Chart detaling fixed vs variable rate fluctuations in Canada
Pricing based on publicly-available rates as of February 2022. Terms and conditions may apply.

Choosing between a fixed and variable mortgage

There’s unfortunately no catch-all approach to choosing a mortgage. But to help you weigh your options we’ve created a list of what to think about before committing to a mortgage. 

What’s an even better idea? Review this list with a mortgage specialist who can bring the numbers and cents alive for you. 

  • How much of a mortgage payment can you afford? 
  • Could you still afford a variable mortgage if the rates were hiked up? 
  • How long will you live in your new home? If you think you might move before your term ends, variable mortgages are cheaper to break or consider a shorter term.
  • How much of a down payment are you making? With that number in hand you can determine your amortization (the bigger the down payment the shorter the amortization you’ll need). Or you’ll find out  if you need to budget for mortgage default insurance premiums required on down payments that are less than 20% of a home’s value. 
  • To find the best rates, take time out to compare and contrast mortgage rates from different lenders. 
  • Consider your risk tolerance. If you want to lock in an interest rate and regular payment towards your principal, a fixed mortgage is your perfect fit. While a variable rate will keep you on your toes while it shifts with the market.

Real-life examples: what these Canadians chose and why

We polled our office to see which kind of mortgage was the most popular and why. Across the board, everyone said they had a fixed mortgage.

Here’s why most of us choose a fixed mortgage over a variable mortgage: 

Do you need life insurance to get a mortgage?

We love our work because we help Canadians understand life insurance in a simple and uncomplicated way. Even if that means letting you know that you don’t need life insurance right now.

But as a general rule of thumb, we typically recommend that people consider getting a life insurance policy if they hold a mortgage to help protect your family with coverage in case you pass away.  

The last thing you want to leave them with is a mortgage they can’t afford to pay for. 

If you expect to pay off your mortgage in 20 years, consider a term life insurance policy that lasts for 20 years. If something happens to you within the life of the policy, your loved ones will receive a benefit that will help pay for the mortgage, your little one’s future education and so much more of your family’s day-to-day expenses. 

Quick note!

Term life insurance gives you financial security during the years when you really need it. And because all families are different (and mortgages, for that matter!), we empower you with the tools you need to personalize your policy. 

In summary: There’s no one-size-fits-all approach to choosing  a mortgage  

  • Interest rates always fluctuate and they’re only one part of the puzzle when it comes to choosing a mortgage. Consider all the pros and cons of a fixed versus variable mortgage such as breakage costs and the best terms for your needs. 
  • What’s your risk personality? If you believe in steady-wins-the-race, a fixed mortgage will feel like a better fit. If you prefer the thrill of chasing the best deal, consider a variable mortgage. 
  • A mortgage is likely one of the largest assets you will ever own, so leave room in your budget to afford term life insurance too. You can start now for as little as $tk/month and know your family can afford your home-sweet-home for the long-run

Helene Fleischer

About the Author

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