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Choosing Between a Fixed vs. Variable Mortgage Rate in Cambridge

Choosing between a fixed or variable mortgage rate is one of the most important decisions when buying a home.
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Choosing between a fixed or variable mortgage rate is one of the most important decisions when buying a home. This decision can significantly impact your financial situation, particularly the amount of interest you pay over the life of the mortgage and your monthly mortgage payments. Throughout the year, the Canadian mortgage market continues to face fluctuations in interest rates, making it crucial to understand the types of mortgage solutions available. We’ll break down the pros and cons of fixed and variable mortgages and their key differences and help you determine which option best suits your financial goals and circumstances. 

What’s the Difference Between Fixed and Variable Mortgage Rates? 

There are Two Types of Variable Mortgages: 

  • Variable-rate mortgage (VRM): In a VRM, your monthly payments remain fixed, but the portion that goes towards interest and principal shifts based on changes in interest rates. If rates rise, more of your payment goes toward interest; if rates fall, more goes toward paying off the principal. The amortization period may change with changes to interest rates as payments remain the same throughout the mortgage term

The current Canadian mortgage market and the broader real estate market heavily influence both options. In 2024, interest rates and mortgage rates in Canada continue to fluctuate, making it essential to consider your financial stability, risk tolerance, and long-term financial goals when choosing between these options. 

Pros and Cons of a Fixed-Rate Mortgage 

Pros: 

  • Predictability: Fixed rates offer stability, as your mortgage payments remain the same throughout the mortgage term, regardless of any changes in the market.  

  • Protection from rate hikes: Locking at a fixed rate protects you from interest rate increases, making it easier to budget. 

  • Long-term planning: Fixed rates provide financial predictability, which helps with long-term financial goals, such as saving for other investments or retirement. 

Cons: 

  • Higher initial rates: Fixed-rate mortgages typically start with higher interest rates than variable rates, which can increase the overall cost of your mortgage.  

  • Prepayment penalties: Breaking a fixed-rate mortgage before maturity can result in significant penalties, often calculated using the interest rate differential (IRD) or three months’ interest—whichever is higher. 

  • Missed opportunities: If interest rates decrease during your mortgage term, you won’t benefit unless you refinance, which can also come with fees and penalties

Pros and Cons of a Variable-Rate Mortgage (VRM) 

Variable-rate mortgages are a specific type of variable mortgage in which your payments remain the same. However, the portion that goes toward the principal and interest adjusts based on changes in the prime rate

Pros: 

  • Potential cost savings: Historically, variable rates have been lower than fixed rates, leading to lower interest payments over the mortgage term, especially when rates are low.  

  • Flexibility: Most lenders allow you to switch from a variable to a fixed rate at any time without a penalty, giving you options if market conditions change. 

  • Lower penalties: If you need to break your mortgage early, variable-rate mortgages generally come with lower penalties—typically limited to three months’ interest. 

Cons: 

  • Unpredictable payments: With VRMs, your principal and interest component on payments can increase or decrease based on changes to the prime rate.   

  • Risk of rate increases: Rising interest rates mean you could pay significantly more interest-carrying costs, slowing your ability to payoff the principal and increasing your amortization

  • Renewal payment shock: If rates rise and you renew your mortgage, you may have negative amortization and face a substantial increase in your monthly mortgage payments, which can impact your mortgage affordability.  

Pros and Cons of an Adjustable-Rate Mortgage (ARM) 

Adjustable-rate mortgages are a specific type of variable mortgage where your payments adjust based on changes in the prime rate

Pros: 

  • Immediate cost savings: If interest rates drop, your monthly mortgage payments decrease, providing instant savings.  

  • Short-term benefits: An ARM allows you to benefit from falling interest rates more quickly, making it a good option in a declining interest rate environment. 

  • Lower penalties: Breaking an ARM comes with lower penalties than breaking a fixed-rate mortgage, typically calculated as three months' interest. 

Cons: 

  • Unpredictability: If interest rates rise, your monthly payments can suddenly increase, making it harder to plan your finances.  

  • Increased financial risk: If interest rates rise during your mortgage term, your mortgage payment can increase significantly. 

  • Budgeting difficulties: Fluctuating payments can make long-term financial planning challenging, especially for first-time buyers or those with tighter budgets. 

Historical Trends and Popularity Shifts 

Historically, variable rates have often been lower than fixed rates, making them an attractive option for homeowners looking to save on interest costs. From 2020 to early 2022, variable-rate mortgages surged in popularity as low interest rates made them a cost-effective choice. However, as the Bank of Canada began raising interest rates in 2022 to combat inflation, the popularity of variable mortgages dropped significantly. By the end of 2023, fixed-rate mortgages accounted for most new mortgages. 

As we move into 2025, variable mortgages may regain popularity as interest rates are expected to decrease. However, it’s essential to closely monitor the market and consider your financial goals and risk tolerance before deciding. 

Drivers of Fixed and Variable Mortgage Rates 

Fixed vs Variable Mortgage in 2025: Which is Right for You? 

The decision between a fixed or variable mortgage in 2025 largely depends on your financial situation, risk tolerance, mortgage rate forecast, and housing market predictions for the coming years. Similar to the Canadian housing market, mortgage rates are influenced by several factors, including inflation, economic growth, and changes in interest rates set by the Bank of Canada. 

Economic Outlook for 2025: 

The Bank of Canada’s benchmark policy rate directly affects interest charged on variable mortgages. Many financial experts predict a gradual decrease in the central bank’s policy interest rates throughout 2025, making variable (VRM) and adjustable (ARM) mortgages more attractive for homeowners willing to withstand some market volatility. If interest rates drop, those with variable rates could save on interest payments and pay down their principal more quickly. There is an almost 200 basis point (2%) difference between today’s policy rate of 3.75% and the lower end of the Bank of Canada’s expected neutral rate of 2.25%. 

Bond yields affect fixed rates, and Canadian bond yields typically follow US treasury yields, making American political and economic expectations paramount when considering a fixed mortgage in Canada. Both parties pose an inflationary risk in the upcoming US election due to growing public debts, leading to higher fixed rates in Canada for years, even if inflationary pressures keep dropping north of the border. 

With closely tied economies, Canada imports most goods from the US, which means American inflation can also be imported alongside goods. Inflationary divergence puts pressure on the Canadian dollar's exchange rate against the US dollar, making everything more expensive for Canadians to purchase. Increasing inflationary pressures could cause the Bank of Canada to increase its policy rate to stabilize our economy, which could cause variable and adjustable rates to increase. 

However, a fixed-rate mortgage may be better if you prefer stability and are concerned about potential rate increases. Locking into a fixed rate will protect you from future rate hikes, offering predictable payments and financial peace of mind. A shorter-term fixed mortgage may offer the best of both worlds for those unsure. You’ll have stability for a few years, with the opportunity to renew at a lower rate if interest rates decline. 

Time Your Mortgage Strategy, Not the Market 

Timing the market can be challenging, especially in periods of economic uncertainty. A key consideration when choosing between a fixed or variable mortgage is your long-term financial goals and ability to handle market volatility. If you anticipate a drop in interest rates, a variable mortgage could save you money in the long term. However, a fixed-rate mortgage may be a better fit if you prefer the certainty of stable fixed payments. 

Timing the Canadian mortgage market can often prove futile. Instead of fixating on market conditions' fluctuations, embracing an expertly crafted mortgage strategy that adopts a holistic approach, aligning with your long-term financial objectives and unique situation, is wiser. For first-time homebuyers (FTHB) or those looking to purchase a home in a fluctuating market or during economic volatility, obtaining a mortgage pre-approval or pre-qualification from a mortgage broker or lender can help you lock in the best mortgage rates and navigate the complexities of the Toronto, Ontario or Canadian real estate market

To effectively purchase or refinance a home or renew your mortgage, it's essential to resist the pull of short-lived market trends, clearly define your financial goals, and implement a long-term mortgage strategy. You can confidently compare mortgage rates in Canada by developing the right mindset, utilizing tools like a mortgage payment calculator to analyze your finances, and consulting with mortgage professionals and brokers. This method allows you to take advantage of opportunities while ensuring your long-term goals stay prioritized. 

Choose the Best Rate For Your Needs 

Choosing the best mortgage rate is not a one-size-fits-all decision, and as our mortgage rate forecast will tell you, sometimes fixed and variable rates can diverge. The right choice depends on your financial situation, risk tolerance, outlook for the Canadian housing market, and mortgage rates in Canada. Variable-rate mortgages offer flexibility and the potential for long-term savings, especially in a declining interest-rate environment, but may come with a side of renewal payment shock if interest rates increase rapidly during your mortgage term. On the other hand, fixed-rate mortgages provide stability and protection from rate hikes, making them ideal for homeowners who prefer predictability. 

With interest rates expected to decrease in 2025, variable and adjustable mortgages may become a popular option again. However, before deciding, it’s essential to review your financial situation and consider factors such as affordability, long-term goals, and market conditions. 

By partnering with nesto mortgage experts, you can create a customized strategy for your home purchase, mortgage renewal, or refinance that aligns with your specific needs, risk tolerance, and long-term goals. These professionals will guide you through the mortgage process and the Canadian mortgage market, ensuring you make decisions that lead to a financially secure future. 

For expert advice on finding the most suitable mortgage strategy, contact nesto mortgage experts today.