Fixed or Variable? The Mortgage Dilemma for Canadian Homeowners
For Canadian mortgage borrowers, the decision between a fixed or variable rate mortgage has long been a financial balancing act. With interest rates having peaked and now in an easing phase, the question is whether it is more prudent to lock in a fixed rate or ride the gradual decline of variable rates.
When selecting a fixed rate, many Canadians choose a 5-year term, so the choise between fixed and variable has less to do with what rates are at today, and more to do with what we expect betweem 2025 and 2030.
The Interest Rate Cycle and Where We Stand
Interest rates move through a cycle consisting of four stages: expansion (rising rates), peak, contraction (declining rates), and trough. The Bank of Canada began raising rates in March 2022 to curb inflation, and after three years, the market is now firmly in the easing phase. Historically, rate-cutting cycles last between two and five years, meaning we may be anywhere from midway through to just beginning a prolonged period of lower rates. While external shocks, such as trade disputes or demographic shifts, could disrupt this trajectory, forecasts suggest that rates will continue their decline through to 2026 before beginning to rise again. Sometime in 2028 or 2029 the variable rate could begin to climb above the current 5-year fixed mortgage rate.
Fixed vs. Variable: The Rate Outlook
At present, five-year fixed mortgage rates stand at 4.7%, while variable rates are at 4.9% and trending downward.
Projections indicate that within three to six months, variable rates will dip below fixed rates and reach a trough of 4.3% by early 2026. Importantly, variable rates are not expected to return to today’s fixed rate levels until at least 2028 or 2029. Thus, borrowers opting for a variable rate now are likely to enjoy lower average interest costs over the next five years—potentially saving 0.3% to 0.4% in borrowing costs.
Hidden Costs and Flexibility
Beyond headline rates, borrowers must also consider the structural differences between fixed and variable mortgages. Fixed-rate mortgages provide certainty but often carry substantial penalties for early repayment or renegotiation. Industry data suggests that more than half of Canadian homeowners break or refinance their mortgage before the term ends, making penalty structures a critical factor. Variable-rate mortgages typically have lower prepayment penalties, offering greater flexibility for those who may sell, move, or refinance within the next five years.
The Verdict
Both fixed and variable rate mortgages offer predictable monthly payments. However, with a fixed rate mortgage, because the rate is fixed for 5 years, you will know exactly how much of the mortgage will be repaid over the 5-year term. Whereas, because the interest costs fluctuate for variable rates, at the end of the 5 years, owners could find they repaid more or less than expected.
For risk-averse borrowers seeking predictability in monthly payments, a fixed-rate mortgage remains a viable option even if, financially, it isn’t likely to provide the best outcome. It does provide many borrowers with peace of mind.
For those willing to accept some interest rate risk, a variable-rate mortgage appears to be the more cost-effective choice in the current cycle.
With rates on a downward trajectory, the likelihood of lower overall interest payments favours those who can tolerate the inherent uncertainty of variable rates. As always, the best choice depends on individual financial circumstances, risk appetite, and long-term housing plans.
