Fixed vs. variable mortgages in Canada: Which is better for today’s homebuyer?

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If you're reading this, you've probably been keeping tabs on the series of rate hikes the Bank of Canada (BoC) has imposed several times this year.

This is essentially the opposite of what occurred in March of 2020 when — right as the pandemic began to unfold — the BoC cut its rate to just above zero.

The low rates of the past two years nurtured a competitive real estate market, faster-than-ever home sales, and record-high home values.

So, why the recent hikes? 

The BoC’s interest rate increases are preventative measures meant to combat growing economic inflation. In the long term, the move is intended to promote greater affordability for Canadians — and it’s just the first proactive change of many to come. In fact, we can expect the bank's upcoming (expected) rate hike on October 26th.

If you’re thinking about moving, it’s natural to be confused about how these changes could impact you this year (and the next one). You may be wondering: Should I buy a new property? How will higher interest rates affect my chances of buying? Should I opt for a fixed-rate or variable-rate mortgage right now? What does the Bank of Canada interest rate increase really mean for me? 

At Properly, these considerations are on our minds, too. That’s because we’re in the business of making the real estate experience as simple, streamlined, and customer-centric as possible. With years of experience in finance and real estate among us, here’s how we’ve been thinking about how to move forward with mortgages right now, and after the future rate hikes expected later this year.*

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Which is better? Fixed vs. variable mortgages

You may be considering buying a home in 2022. Before deciding on which mortgage type works best for you, let’s define each one and learn their pros and cons.

What is a fixed-rate mortgage?

A fixed-rate mortgage is a home loan with a fixed or constant interest rate for the entire payment term (usually a period of 1-5 years).

The pros of fixed-rate mortgages

Homeowners who opt for fixed-rate mortgages know exactly what they’ll be paying each month. This makes managing a monthly budget much easier.

Fixed-raters have an unchanging monthly payment until the time comes to renew their mortgage. The payment amount remains the same, regardless of any shifting market conditions (like the recent BoC interest rate change).

The cons of fixed-rate mortgages

Those paying fixed-rate mortgages pay a premium and won’t be able to take advantage of drops in the interest rate. 

While you can enjoy the predictability and security of your monthly payment amount, regardless of whether interest rates go up or down, opting for a fixed-rate mortgage means you’re likely to pay for it at a slight premium (of roughly 2%). And, you won’t be able to enjoy paying less when interest rates eventually drop in future.

What is a variable-rate mortgage?

A variable-rate mortgage is a home loan with an interest rate that fluctuates. It isn’t constant in the way a fixed rate is. Instead, those with variable-rate mortgages experience changes in their payments when interest rates trend upward or downward.

The pros of variable-rate mortgages

For variable mortgages, the lending rate is typically lower than it is for fixed-rate mortgages — this is to compensate the borrower for accepting interest rate risks. 

This can work out in the borrower’s favour if the interest rates drop (or don’t rise), because their monthly payment amounts will drop, too.

The cons of variable-rate mortgages

When interest rates increase like they did earlier this month, people with variable-rate mortgages will see their mortgage rates increase, too. And they may find their new, higher payment amounts unaffordable (Note: the BoC expects at least two additional consecutive rate hikes in the near future). 

Variable rates also make monthly mortgage payments more difficult to forecast and budget out.


PROPERLY POINTER: To qualify for a mortgage with an A lender (a.k.a. regulated big Canadian banks and credit unions), you’ll need to pass the mortgage stress test

Introduced by the federal government as a way to protect homebuyers from overextending themselves with mortgage payments in the long term, the stress test calculates what your mortgage payments would be if interest rates rise to a value called a “qualifying rate” (that’s 5.25% or your mortgage contract rate plus 2 — whichever is higher). 

You can avoid the stress test with less regulated lenders (B lenders or private lenders) but beware: lower barriers to mortgages from these lenders might mean higher interest rates for you.

When do I need a stress test? 

When you’re refinancing your mortgage, switching mortgage lenders, or purchasing a home.

When do I NOT need a mortgage stress test? 

If you’re renewing your mortgage with the same lender or if you’re working with a private lender.


Did you know? There’s a third type of mortgage: Static/Adjustable

If you want to take advantage of low rates but also crave predictability, a combination of fixed- and variable-rate mortgages might be your ideal option.

Some banks offer a fixed-payment variable rate, where the monthly payment amounts stay the same for the next 5 years. But, if the rate fluctuates behind the scenes, the bank maintains your payment amount by adjusting how much goes toward interest versus your principal investment (your home!).

While this seems to be the best of both worlds, and there’s no material impact at the mortgage renewal stage, terms for each loan could be different, and therefore more challenging to manage during the renewal process. You may also face significant challenges if you decide to renew with a different lender. 


PROPERLY POINTER: Breaking down A lenders, B lenders, and private lenders

What are ‘A lenders’?

‘A lenders’ are highly-regulated, traditional institutions that tend to lend to people with predictable incomes and solid credit scores. These lenders can include banks, credit unions, and other institutions that are subject to federal regulation. If you’re applying for a loan from an A lender, a mortgage stress test is a must. 

What are ‘B lenders’?

These secondary, less-regulated lenders serve customers with less predictable income, and/or who may require fewer barriers to securing a mortgage loan. Because they’re servicing clients who have a weaker credit history or unpredictable cash flow, B lenders offset this risk with higher interest rates.

What are private or unregulated lenders?

The scope of unregulated lenders is vast: they could include mortgage-specific businesses or even family. No stress test is required here, but proceed with caution. If the qualifying bar is low, you should assume (and research to confirm) that the interest on these loans will be high. 


Fixed vs. variable: Which is best right now?

If you’re wondering if the April 2022 interest rate hike will have an impact on your current mortgage rate, your chance of qualifying for a mortgage, or how much you can afford to spend towards a new home, the answer is: it depends

Whether you’re deciding to switch to a different mortgage type, or about to choose a new one, it’s important to consider a few key pieces about both fixed and variable rates.

Right now, you may find it easier to qualify for the loan you need using a variable rate 

Everyone who currently has a variable-rate mortgage will be impacted by the recent 0.5% increase. In an effort to avoid paying even more in the future, many variable-rate holders are likely considering moving to a more predictable 5-year fixed rate right now.

According to MoneySense, the time to switch to a fixed-rate mortgage has passed, though, since the low 5-year fixed rates of 2.59% and 2.99% are no more. But fear not: variable rates are still very competitive and “even with a couple more hikes, your variable rate will likely be well below current 5-year fixed rates.” 

And a tip for those looking to avoid plan-switching penalties: as MoneySense notes, there’s no penalty to convert from a variable-rate mortgage to a fixed mortgage, but there’s always a penalty if you switch from a fixed to a variable one.

Fixed-rate mortgages are now harder to attain and more expensive in the long run

The BoC rate increase means that it may be more challenging to pass the mortgage stress test right now — and harder to qualify for a fixed-rate mortgage with a federally-regulated A lender as a result. This means that more Canadians may be looking to take on riskier mortgages, turning to less regulated lenders, and taking on larger interest payments in the process.

A fixed-rate can still be more expensive in the long run if the future holds a flat or declining interest rate environment. In a rising interest rate environment, it would depend on how fast variable rates accelerate.

If you’re feeling uncertain, seek out personalized advice from professionals

For new homebuyers making a mortgage decision right now, there are many things to take into account in light of the shifting real estate market. Consider your financial ability to pay off a loan in the long term and the type of lender you’d like to leverage. It’s also helpful to ask yourself some orienting questions, such as:

  • What’s my risk tolerance?
  • Can I pass the mortgage stress test? 
  • Can I afford a mortgage that ebbs and flows with the market?
  • What's my minimum, median, and/or maximum monthly payment threshold?
  • Can I afford to pay a premium for a fixed interest rate?
  • What type of lender do I want to work with?
  • Do I prefer paying the same amount monthly, or am I okay with fluctuations?

If you’re thinking about buying or selling (or both) this year, and are looking for more advice on how to navigate upcoming market changes, Properly’s housing experts can help. 

However you proceed, do your due diligence, know your financial situation inside out, and consult your trusted financial advisor in depth before moving confidently forward. When it comes to mortgage options in this fluctuating market, it’s your move, and one size does not fit all.

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*DISCLAIMER: This article is provided for informational purposes only. It is not an exhaustive review of this topic. The content is not financial or investment advice. No professional relationship of any kind is formed between you and Properly Homes Inc. While we have obtained or compiled this information from sources we believe to be reliable, we cannot and do not guarantee its accuracy. We recommend that you consult a trusted professional before taking any action related to this information. Properly is a tech-enabled real estate brokerage that is transforming the home buying and selling experience with AI-powered home valuations and a modern streamlined service. We recommend that you compare and contrast your options, read the fine print, and conduct detailed research into any real estate, loan, or investment provider before using their services.*

Properly is a Canadian tech-enabled real estate brokerage transforming the home buying and selling experience as the only service in Canada that helps homeowners to buy before they sell.