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I’m watching it happen again.

Right now, 52% of borrowers are choosing variable rates because they’re lower than fixed. In January 2022, that number hit 56.9%. We all know how that turned out.

The setup looks different this time. Fixed rates have climbed in response to geopolitical tensions from the Iran conflict and inflation expectations. Variable rates haven’t caught up yet. That gap creates what looks like an opportunity.

It’s not.

What the Spread Actually Tells You

When you see fixed rates at 4.5% and variable at 3.8%, you’re looking at a 70 basis point cushion. Most people see savings. What they’re actually seeing is a warning signal.

Bond traders and economists are pricing in the risk of future rate increases on fixed rates. The Bank of Canada, which guides variable rates, will react once we’ve reached those risks that the bond market has priced in months earlier.

The bond market is front-running the Bank of Canada’s eventual moves.

Think about it this way: you’re seeing storm clouds and thinking “great, no rain yet” instead of grabbing an umbrella. The gap exists because fixed rates are already protecting against what’s coming, while variable is still sitting at today’s reality.

The spread is telling you that the market expects rates to go up, not that you’re getting a deal.

The Math Behind the Risk

Here’s what that 70 basis point spread actually means.

If the Bank of Canada moves in 25 basis point increments, you need roughly three hikes before you’re at parity with fixed. So the question becomes: what’s your timeline? If we’re looking at potential hikes over the next 12-18 months, can you absorb those increases in your cash flow?

I’m not talking about whether you qualify for the mortgage. I’m talking about your actual life.

Do you have kids in daycare? Are you funding RRSPs? Do you travel twice a year? What happens if one income drops temporarily?

Most people think in terms of “we can afford the payment” but they haven’t mapped out what happens when that payment goes up by $150, then another $150, then another $150 over 18 months. They’re not thinking about the cumulative effect.

There’s usually a massive gap between what people qualify for and what they can actually live with. Qualification is based on a stress test rate, but that’s a theoretical exercise. It doesn’t account for how you actually spend money.

The real test isn’t whether you can make the payment. It’s whether you can make the payment without completely changing your life or burning through savings.

Why People Keep Making the Same Mistake

Short-term memory and recency bias.

People saw rates drop in late 2023 and through 2024, so that pain from 2022 feels distant now. They remember the relief of falling rates more vividly than the stress of rising ones. There’s also this belief that “it won’t happen again” or “the Bank of Canada learned their lesson.”

But the bigger issue is that most people don’t actually understand why 2022 happened. They think it was a fluke or bad timing, not a predictable response to inflation.

By October 2022, about 50% of all variable-rate mortgages with fixed payments had already hit their trigger rate. Those with adjustable payments saw median payment increases of 70% by November 2023 compared to February 2022 levels.

So when people see a spread today, they don’t connect it to the same pattern. They’re focused on the immediate savings and convincing themselves that this time they’ll be smarter, they’ll lock in when rates start moving.

But by the time rates are clearly moving, the opportunity to lock in at a good rate is already gone.

The Two Types of Variable Pain

Here’s something most people don’t understand: not all variable products behave the same way.

An adjustable rate mortgage means your payment adjusts automatically with every Bank of Canada decision. Your cash flow gets impacted immediately. This can make things very tough and maybe force you to look at other options or sell your property right away.

A variable rate mortgage has a fixed payment with a varying interest rate. A Bank of Canada change doesn’t trigger a payment change. It just alters your amortization.

In an adjustable mortgage, you feel the pain immediately through higher payments. In a variable mortgage with fixed payments, you feel it later when your balance ends up being a lot larger than you expected at maturity.

That deferred pain can trigger higher payments when you renew, or put you in a negative equity position where your mortgage balance exceeds your home value. For some people who bought in 2022 and went into one of these products, they experienced this exactly, and it ties you to a lender or worse a property you can’t sell.

The other side is that you do have time to adjust. You can increase your payment at your own pace and make lump sum payments. It just pushes the decision a little bit further down the road than one that’s made for you in an adjustable mortgage.

When Variable Actually Makes Sense

I’m not saying variable is always wrong.

If you’re planning to sell or refinance within two years, the flexibility of variable might outweigh the risk because you’re not exposed to the full cycle. Variable products also give you optionality to lock in later and easier exit strategies if you need to get out of the mortgage early.

But here’s the critical part: you need to go into a variable expecting payment increases.

That way, you’re not being naive to potential outcomes. If hikes happen, which product is going to be a better fit for you? Do you want to keep your amortization on track? Do you want payment protection?

The people who make confident decisions are the ones who set their parameters upfront. They know their pain threshold, they know their timeline, and they’ve defined what triggers a change.

It’s not “I’ll lock in when rates feel high.” It’s “if my payment increases by more than $400 total, I’m locking in regardless of where fixed rates are.” Or “if we hit three consecutive hikes, I’m out.”

The Framework You Actually Need

Without a pre-defined strategy, people are just reacting emotionally to each rate announcement. They’re making decisions based on fear or regret instead of their actual financial situation.

The ones who avoid paralysis are the ones who treat their mortgage like a business decision with clear metrics, not a gamble where they’re trying to time the perfect moment.

You can’t time it perfectly. But you can decide in advance what you’re willing to tolerate and what you’re not.

Right now, Canada’s 10-year government bond yield has risen to 3.74%, the highest level in over two years. Fixed rates are pricing in geopolitical risk and inflation expectations from the Iran conflict. Variable rates haven’t caught up yet.

That gap you’re seeing? It’s not a discount. It’s the market telling you what it fears is coming.

The question isn’t whether variable is cheaper today. The question is whether you understand how it behaves, whether you have appetite for potential volatility, and whether you’ve built a framework to make decisions when the pressure hits.

Because it will hit. The only question is whether you’ll be ready.

That’s the difference between strategy and hope.

Are you choosing the lowest rate… or the right strategy?

A lower variable rate can look attractive today — but the spread between fixed and variable isn’t always a deal. Sometimes it’s the market pricing in what it expects is coming next.

The real question isn’t whether you qualify for the payment today. It’s whether your finances can handle what happens if rates keep moving higher.

If you want to walk through what makes the most sense for your situation and risk tolerance, I can help you map it out clearly.