Choosing between a fixed and variable rate mortgage can feel like a high-stakes decision — especially in today’s unpredictable economic climate. With interest rates shifting, inflation pressures still hanging around, and market volatility being influenced by global politics (yes, we’re looking at you, Trump), it’s no wonder many homebuyers and homeowners are left wondering which path to take.
Let’s break it down.
Fixed-Rate Mortgages: The “Set It and Forget It” Option
Fixed-rate mortgages offer the kind of predictability many people crave. Your rate is locked in for the term — usually 1 to 5 years — and your payments stay the same no matter what happens in the markets.
This option is ideal if:
- You want peace of mind and stability in your budget.
- You expect rates to rise over the next few years.
- You’re risk-averse or just prefer not to watch the markets closely.
However, there’s a trade-off. Fixed rates can come with a higher cost than variable rates over time, if interest rates are slated to decrease. Currently variable rates are slightly above fixed rates, but with the “experts” predicting further prime rate decreases, variable is likely to be lower than fixed in the next 6 -12 months. Furthermore, if you need to break your mortgage early, the penalties can be steep — typically based on the interest rate differential (IRD), which can be thousands more than what you’d pay on a variable rate mortgage.
Variable-Rate Mortgages: The Flexible, Watch-the-Market Choice
Variable-rate mortgages are currently slightly higher than fixed mortgages. In a market where interest rates are expected to decrease, choosing a variable rate can often be the winner when doing a dollar for dollar comparison. They can be a great money-saving tool — if rates drop. But with this option, your rate is tied to your lender’s prime rate, which can go up or down based on the Bank of Canada’s decisions (and the bond market’s response to economic news).
Some lenders will keep your payment the same but adjust how much goes to interest vs. principal. Others will increase or decrease your payment when the rate changes. Make sure you know what kind of variable you’re signing up for.
And here’s something many borrowers don’t realize: you can convert a variable-rate mortgage to a fixed one at any time, for a term equal to or greater than your remaining term. This gives you some flexibility if rates start rising and you want to lock in some certainty. The only downside is that you’re stuck with your existing lenders rate options unless you want to pay a penalty to switch lenders.
Market Factors: Why Things Feel So Unstable Right Now
We’re in a strange economic period. Inflation has cooled a bit, but uncertainty still looms large — especially as global markets react to political developments. One example? Donald Trump’s flip-flopping on tariffs.
One day, he’s easing off. The next, he’s doubling down. Markets don’t like uncertainty, and bond yields (which influence fixed mortgage rates) can swing significantly based on his latest statements. One offhand comment can cause a ripple effect across the financial world, moving rates in either direction almost overnight.
This kind of instability makes it especially tough to time the market. Locking in a fixed rate might give you peace of mind, but you could miss out on savings if rates drop. Staying variable might save money now, but could cost more later if rates jump unexpectedly.
The Middle Ground: Split Mortgages
Not sure whether to commit to fixed or variable? You don’t necessarily have to choose just one. Some lenders offer hybrid mortgages, where part of your loan is on a fixed rate and part is on a variable rate. This can help you balance risk and reward, especially if you’re feeling torn between both options.
Risks and Considerations
When deciding between fixed and variable, consider the following:
- Your cash flow: Can you absorb higher payments if rates go up?
- Your financial goals: Are you planning to sell or refinance before your term is up?
- Your personality: Are you the type to lose sleep over market movements?
- Your lender’s policy: Will they let you lock in a variable rate easily? What’s their penalty structure?
- Your life stage: First-time buyers with tight budgets may prefer stability, while investors or seasoned homeowners might lean toward flexibility.
Everyone’s situation — and tolerance for risk — is different. That’s why there’s no one-size-fits-all answer here.
When to Lock In a Variable
If you’ve gone the variable route, keep an eye on where rates are trending. If history has taught us anything — even over the last five years — it’s that you need to monitor not just your own rate, but also what fixed rates are doing.
During the last major increase after COVID, we saw variable rates jump a whopping 4.75% in a very short time. For those on variable rates who were only watching their payments, by the time they decided to lock in, fixed rates had already climbed significantly — often 1% to 1.5% higher than their current variable rate.
On the flip side, those who were watching the bond market and locked in early ended up benefiting immensely.
If you want to keep an eye on the bond market and track the trend of fixed rates, here’s a great website I monitor daily:
👉 MarketWatch – 5-Year Canadian Bond Yield
A good time to consider locking in might be:
- When fixed rates are still relatively low and close to your current variable rate.
- When you see bond yields start to increase.
- When inflation rises and the Bank of Canada is expected to increase the overnight rate.
- If your personal situation changes — say, you’re starting a family and want more predictability in your budget.
Your mortgage broker (hi, that’s me) can help monitor all this and walk you through the lock-in process if and when it makes sense.
Final Thoughts
In today’s world of economic uncertainty — driven in part by volatile political moves like Trump’s shifting tariff strategies — choosing between a fixed or variable mortgage rate isn’t easy. But here’s some perspective: right now, fixed rates are sitting in the high 3% to mid 4% range, which is historically quite reasonable. In fact, this is around where rates should be in a more balanced, stable market. We don’t expect to see mortgages in the 2 percent range like we did during the pandemic.
So while variable may still offer some upside if rates drop, locking in a fixed rate at these levels is far from a bad option. For many, it’s actually a smart move to gain peace of mind in an otherwise unpredictable environment.
That said, there’s no one-size-fits-all answer. Your income stability, risk tolerance, future plans, and overall financial goals all play a role in finding the right fit.
Let’s talk about your situation. We’ll walk through the pros and cons together and find the best mortgage strategy for you — whether that’s fixed, variable, or a combination of both.
Reach out today to book a free consultation. Let’s figure out what makes the most sense for you in this unpredictable market.
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