Fixed or Variable Mortgage Canada (2025 Guide)

Choosing between a fixed or variable rate mortgage?

It's one of the biggest decisions you'll face when you buy a home, with each option having its own risks and benefits.

In this post, we’ll explain how fixed and variable rate mortgages work, and outline their key differences for buyers in 2025.

We’ll also look at key factors to consider to make the best choice — including economic conditions and personal preferences like your goals and risk tolerance.

Fixed-rate Mortgages

With a fixed-rate mortgage, your interest rate stays the same throughout the entire term of your mortgage with the interest rate based on the Canada 5 Year Government Bond yield.

The term of a fixed mortgage rate is usually 2, 3, or 5 years, with 5 years being the most common.

Fixed-rate mortgages give you stability with your monthly payments, giving you peace of mind against rate hikes, while making your budgeting easy and predictable.

The catch? If interest rates decline during your mortgage term, you'll pay more in interest than a variable mortgage holder until your next renewal.

Variable-rate Mortgages

With a variable mortgage rate, the interest on your mortgage payment changes each month based on the Bank of Canada’s prime rate, which means your monthly payments can vary by hundreds of dollars every month.

For example, if you have a $800K mortgage with a 5.35% variable rate mortgage and your interest rate increased by 0.5%, your monthly interest payments would increase by approximately $240.

In most market conditions, variable or adjustable rate mortgage rates are lower than fixed rates, which can be attractive if you're willing to take on some risk. Remember that you'll pay more if interest rates rise, but also save money if interest rates decrease.

Some lenders offer variable-rate mortgages with fixed monthly payments to keep your budget steady. With a fixed-payment, variable-rate mortgage, when interest rates rise, a larger portion of each payment goes toward covering interest, and less goes towards paying down the principal. This can create a "snowball effect," where you increase your debt balance, prolong the mortgage term, and ultimately pay more in interest over time.

Curious about how this fits your budget? Talk to a Vantage West Realty Inc. agent today.

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Understanding Fixed vs Variable Rates in 2024-25

Fixed rates are intended to protect borrowers from future interest rate increases and surprises to their monthly interest payments.

Typically, the fixed rate is higher than the variable rate because you pay a premium for the stability and predictability in interest payments during the term period.

If you checked the mortgage rates from any Canadian lender in November 2024, you’ll have noticed the variable rate (5.38%) was higher than the fixed rate (4.77%):

3 Year Fixed: 4.780% (Dec. 2024: 4.890%)

5 Year Fixed: 4.770% (Dec. 2024: 4.890%)

5 Year Variable: 5.380% (Dec. 2024: 4.950%)

Why were variable rates higher than fixed in November 2024?

In normal economic conditions, fixed mortgage rates are typically higher than variable rates because of the additional risk and stability that lenders take on when offering a fixed rate over a long term. Lenders charge a premium on fixed rates to offset the risk of future rate increases and the higher cost of securing long-term funding, while variable rates are based on shorter-term rates that can adjust with the market.

Right now the 5 year fixed is 4.77%, and the 5 year variable is 5.38%, meaning there is a premium on variable rates.

Simply put, the variable rate premium in 2024 is due to an inverted yield curve, which means that short term rates are higher than long term rates and bond investors are anticipating rate cuts.

The Yield Curve & Our 2025 Mortgage Rate Forecast

In typical economic conditions, the yield curve (the difference between short-term and long-term interest rates) slopes upward, meaning that long-term rates are higher than short-term rates.

Now, the yield curve is sloping downwards, meaning that short term rates are higher than medium-term or long-term rates. A downward sloping yield curve is typically indicative of an impending economic recession or downturn. When the market anticipates that future economic growth will weaken and central banks will have to lower interest rates in the medium to long term, demand for long-term bonds increases, pushing their yields down.

In 2024, the bond market is anticipating further rate cuts from the Bank of Canada due to 2 factors: easing inflation concerns and a slowing economy. During slow economic times, central banks typically lower rates to make borrowing cheaper and encourage businesses & consumers to investment & spend more.

Remember that fixed rates are based on Canada 5 Year Government Bond yields, while variable rates are based on your mortgage lender’s prime rate.

As expected, the Bank of Canada lowered rates by a half point in December 2024, bringing the 5 variable rate (4.95%) closer in line with the fixed rate (4.89%).

Fixed vs. Variable: What Happens When Rates Drop?

In this scenario, if the Bank of Canada reduces the policy rate, only variable-rate borrowers see immediate benefits in their payments, while fixed-rate borrowers remain unaffected.

Fixed-Rate Mortgage: Your payments stay the same regardless of interest rate changes. You'll miss out on immediate rate drop benefits but have more stability during the term. You can consider refinancing the mortgage if rates drop significantly, though this typically incurs fees.

Variable-Rate Mortgage: Payments fluctuate based on interest rate changes, providing you with potential savings if rates decline. Be prepared for payment increases if rates rise again in the future.

Here’s how a 0.5% and 1% drop in Canadian mortgage rates would affect monthly payments for an 800K variable rate mortgage balance:

Starting Rate at 5.35%: Monthly payment = approximately $4,876.

With a 0.5% Decrease (to 4.85%):

• New monthly payment = approximately $4,665
• Saves about $211 per month in interest costs

With a 1% Decrease (to 4.35%):

• New monthly payment = approximately $4,461
• Monthly savings of around $415

Find out what you’ll pay in interest with our Canadian Mortgage Calculator.

What happens at the end of my mortgage term?

At the end of a fixed-rate mortgage term (typically 2, 3, or 5 years), you have a few options as a borrower:

Renewal: Your mortgage gets renewed if the loan isn’t fully paid off. You can either renew with their existing lender at the current fixed or variable rates or shop around to get the best mortgage rate.

Refinancing: You might opt to refinance, adjusting your mortgage terms, rate type, or even access your home equity. Refinancing can offer better rates or flexibility but often requires re-qualification, especially with a new lender.

Switching to Variable: If the economic climate favors it, you may decide to switch to a variable-rate mortgage and capitalize on potentially lower rates.

Full Repayment: Though less common, you can choose to pay off the remaining balance in full at the end of the term, which would close out the mortgage without renewal.

Canadian Variable Rate Mortgage vs. Fixed: What’s Best for You?

In today’s economic climate, fixed and variable rates both have distinct risks and rewards.

... Risk-Averse? Consider Fixed Rate
If you’re someone who values stability, predictability and wants to avoid fluctuations in your mortgage payments, asking your mortgage broker for a fixed-rate mortgage offers peace of mind and is generally a safer financial choice.

... Comfortable with Some Uncertainty? Variable Rate Can Offer Savings
For borrowers who can tolerate some risk, variable-rate mortgages often start with lower rates, which could translate into savings if interest rates remain steady or decline. Variable rate mortgages carry the risk of increased payments if rates go up.

... Consider Economic Conditions
Economic factors like inflation, economic growth, and rate trends all play a role in determining whether a fixed or variable rate is better suited to the times.

In periods of economic uncertainty, many borrowers gravitate toward fixed rates to ensure stability.

If experts predict rate hikes, a fixed-rate mortgage might offer more stability. On the other hand, if rates are expected to drop, a variable-rate mortgage could save you money in the form of lower interest payments and a faster principal paydown.

Get Expert Guidance from Vantage West Realty

First-time buyer or looking to renew?

Make sure you choose a mortgage type that aligns with your financial situation and long-term goals.

At Vantage West Realty, our experienced advisors are here to help you navigate these options and make an informed decision.

Contact us today to discuss buying or selling in the Okanagan Valley, BC.

We can connect you with the very best real estate advisors, mortgage brokers, and insurance professionals to guide you every step of the way and make the best mortgage choice.

Schedule a call with Vantage West Realty: Kelowna’s top-rated independent real estate firm.