Fixed vs Variable Rate Mortgage

As a seasoned mortgage broker in Toronto, I often encounter clients grappling with the critical decision of fixed vs variable rate mortgages. In this ever-evolving financial landscape, especially with the current market conditions of Winter 2023 and what’s to come in 2024, understanding the nuances of each option is crucial. In this guide, I’ll demystify these mortgage types, exploring their pros and cons, and delve into how current high-interest rates, poised at a potential peak, influence this significant choice. Whether you’re a first-time homebuyer or a seasoned investor, this insight aims to empower your decision-making in securing the best mortgage option for your unique financial journey.

Fixed Rate Mortgages

What They Are:

  • A fixed rate mortgage has a constant interest rate throughout the term of the loan, ensuring predictable monthly payments.

Terms Available:

  • Common terms in Canada range from 1 to 10 years, with 5 years being the most popular.
  • Shorter terms (1-3 years) may offer lower rates but less long-term certainty. Check current market trends below.
  • Longer terms (5-10 years) provide stability but typically at higher rates.  Check current market trends below.

Pricing Factors:

  • Based on the bond market, as lenders use this to hedge the cost of lending.
  • Influenced by economic factors like inflation, unemployment rates, and GDP growth.
  • The risk profile of the borrower also plays a role – credit score, income stability, etc.
  • Because lenders are providing you a rate guarantee for a term, there’s typically a bit of a risk premium built into your rate.


  • Stability: Fixed payments ease budget planning.
  • Predictability: Immune to interest rate fluctuations.
  • Peace of Mind: Suitable for risk-averse clients.


  • Higher Rates: Often start higher than variable rates.
  • Less Flexibility: Penalties for breaking the mortgage can be substantial.
  • Missed Opportunities: If rates decrease, clients are locked into a higher rate.

Variable Rate Mortgages

What They Are:

  • The interest rate of a variable rate mortgage fluctuates with the lender’s prime rate.
  • Monthly payments can change throughout the term – either the amount paid towards interest adjusts, or the payment amount itself changes.

How They Are Priced:

  • Tied directly to the lender’s prime rate, which in turn is influenced by the Bank of Canada’s policy interest rate.
  • The rate is usually expressed as “prime minus a specific percentage” (e.g., Prime – 0.5%).


  • Lower Rates Initially: Often start lower than fixed rates.
  • Savings Potential: Beneficial if interest rates decrease.
  • Flexibility: Typically lower penalties for breaking the mortgage.


  • Uncertainty: Payments may vary with interest rate changes.
  • Budget Planning: Fluctuating payments can complicate financial planning.
  • Risk: Unsuitable for clients uncomfortable with uncertainty.

Variable vs. Adjustable Rate Mortgages

Variable Rate:

  • The total monthly payment might remain constant, but the portion that goes towards the principal vs. interest varies.
  • If interest rates rise significantly, more of the payment goes towards interest, less to principal, potentially extending the amortization period.

Adjustable Rate:

  • The interest rate is variable, but the difference lies in the payment structure.
  • The monthly payment amount fluctuates with interest rate changes.
  • As rates change, the payment amount is adjusted to ensure the mortgage is paid off within the original amortization schedule.

Current Market Conditions: Winter 2023

The mortgage landscape in Winter 2023 presents a unique scenario for prospective homeowners and investors in Toronto. We’re currently navigating a period where interest rates are notably high, suggesting they might be at or near their peak. This trend has sparked widespread speculation that rates are expected to start trending downwards in the next 6 to 8 months, some speculating even as soon as April 2024. Because of these projections of rates being high for a short period of time, fixed rates are currently inverted with 1 Year Fixed being in the highest rated term and 5 Year Fixed being the lowest rated term.  Locking into a 5 Year Fixed at decade high rates is something that should be done with great caution and only given the correct circumstances.  Such a climate poses both challenges and opportunities for those considering fixed or variable rate mortgages.

While high rates may initially seem daunting, the potential for a downward trend in the near future adds a layer of complexity to the decision-making process. It’s a pivotal time for borrowers to carefully evaluate their options, keeping a keen eye on the evolving economic indicators and Bank of Canada announcements, to make well-informed mortgage choices aligned with their financial goals.  During a downward trend, the adjustable rate mortgage will be the preferred product as it will give borrowers the much desired cash flow relief as rates start to drop.

Decision Factors: Fixed vs Variable Rate Mortgage

When navigating the choice between fixed or variable rate mortgages, several key factors play a pivotal role in guiding this decision. Foremost is the individual’s risk tolerance. A fixed-rate mortgage, with its predictability and stability, is often preferred by those who are risk-averse or those who prioritize consistent budgeting without surprises.

On the other hand, a variable rate mortgage can be more appealing to those who are comfortable with some level of risk and are willing to bet on future rate decreases for potential savings. Financial stability and future income prospects are also crucial considerations. Those with stable and predictable income streams might find variable rates more attractive, leveraging the initial lower rates and the flexibility they offer. Conversely, those with fluctuating or uncertain incomes might lean towards the security of fixed rates.

Additionally, current market trends and economic forecasts play a significant role. With the current scenario of potentially peaking interest rates in Winter 2023, individuals need to weigh the likelihood of rates decreasing in the near future and how that aligns with their mortgage term and financial plans. Ultimately, the choice hinges on a careful balance of personal financial circumstances, risk appetite, and an informed view of future market trends.

If you would like to discuss this further, please feel free to book a consultation with Marshall Tully.


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