Fixed vs Variable Rate Mortgage: How to Decide (2025)

One of the most common questions I get: should I go fixed or variable? There's no universal answer, but here's how to think through it.

Fixed Rate Mortgage

A fixed rate mortgage locks in your interest rate and payment for the entire term (typically 5 years).

Pros:

Payment certainty — your payment never changes, regardless of what rates do
Easier budgeting for households with tight cash flow
Protection if rates rise significantly during your term

Cons:

Usually starts higher than the variable rate equivalent
Breaking a fixed mortgage early (to refinance or sell) typically incurs a larger prepayment penalty (Interest Rate Differential, or IRD)

Best for: Buyers who value predictability, are at the top of their budget, or expect rates to rise.

Variable Rate Mortgage

A variable rate mortgage has a rate that moves with your lender's prime rate, which tracks the Bank of Canada's policy rate.

There are two types:

Variable rate, variable payment (VRVM): Your payment changes as rates move
Variable rate, fixed payment (VRFPM): Your payment stays the same, but the split between principal and interest shifts

Pros:

Historically lower over time — studies show variable rate borrowers have paid less interest over most 5-year periods
Prepayment penalties are typically just 3 months' interest (much less than fixed)
If rates fall, you benefit immediately

Cons:

Payment uncertainty (for VRVM)
Psychological stress of watching rates fluctuate
In rising rate environments, you can end up paying more

Best for: Buyers with room in their budget, those who plan to break the mortgage early, or those who believe rates will fall or stay flat.

Historical Context

Over the past 30 years, variable rate borrowers have typically paid less interest than fixed rate borrowers — though the COVID-era rate hikes (2022–2023) were a painful exception.

With the Bank of Canada cutting rates in 2024 and expected to continue in 2025, variable rates are becoming increasingly attractive again.

How to Decide

Ask yourself:

Can I handle payment variability? If not, fixed gives peace of mind.
Am I likely to break my mortgage early? Variable penalties are much smaller.
How much room is in my budget? If you're stretched, fixed certainty is safer.
What's my outlook on rates? If you think rates will fall, variable benefits you.

A Note on Terms

Whatever you choose, remember that your term (typically 5 years) is not the same as your amortization (typically 25 years). At the end of each term, you renew — at whatever the market rate is. This means even fixed rate borrowers will eventually face rate changes.