As Interest Rates Rise, Should You Choose a Variable or Fixed-Rate Mortgage?

The Bank of Canada interest rate increases has been a hot topic for Canadians with mortgages and home equity lines of credit (HELOC). The Bank has increased rates seven times this year. Although we don’t know what’s to come in 2023, prospective and existing homeowners are wondering whether they should opt for a variable or fixed rate mortgage. Here’s what to consider before you make a decision. 

Fixed-rate mortgages

A fixed-rate mortgage remains the same throughout the entire term of your loan, but may lead to slightly less purchasing power as the rate is usually a little higher than a variable rate. Contract lengths can vary from a few months to a decade, but they are often three or five-year terms. They tend to have higher rates than variable-rate mortgages, but if you’re able to lock in a low-interest rate mortgage or you want to budget for consistent payments, it’s a good option to consider.

Variable-rate mortgages

A variable rate mortgage will change as the prime rate of your financial institution changes. These rates vary depending on the overnight lending rate issued by the Bank of Canada. If you’re looking to take advantage of a lower rate or if rates are expected to drop, this could be a good option, as long as you have some flexibility in your household income to take on any changes in monthly payments throughout your term. A capped variable rate is another option, meaning your payments will never exceed a certain threshold, but you will likely have to pay an additional premium along with this. 

Variable rate mortgages have proven to be less expensive over time than fixed rate options, but a significant increase in the prime rate, like we’ve seen in 2022, will increase how much you have to pay. A fixed rate will offer greater stability but if there’s a significant difference between the two then paying the premium may not be worth it. 

Determining which is best for you

When deciding which rate option is best for you, you’ll need to determine if you’re planning to stay in the home for the entirety of your term, or if for any other reason you may need to break your mortgage term. A variable mortgage allows you to break at any point, and while there still may be penalties, they are usually significantly lower than those for breaking a fixed-rate mortgage. Also worth considering is your financial situation. Is your job long-term and stable? And what are your monthly expenses like and do you have enough wiggle room to adapt to monthly payments, particularly if they increase?

Shopping around to understand what options what options you have to choose from will also help you make the decision. There are many websites that compare available rates, or you can speak to a mortgage broker or lender to learn about the rates available. 

If you have a financial planner, a mortgage broker, or a trusted real estate agent, they will all have a wealth of information that can help you determine which option is right for you. You can often set up a call or in-person meeting for free to discuss your options and goals.