FIXED RATES VS VARIABLE RATES. WHAT IS THE BETTER MORTGAGE OPTION?

FIXED RATES VS VARIABLE RATES. WHAT IS THE BETTER MORTGAGE OPTION?

The 5 year fixed rate is the most popular mortgage term in Canada, with 60% of Canadians choosing this term, but this might cause you to pay tens or even hundreds of thousands of dollars in added interest.

I'm Mat from Canadian Finance, and today we are going to dive deep into the comparison between fixed rates and variable rates.

A 2001 study found that choosing a variable-rate mortgage over a fixed rate was the better option nearly 90% of the time between 1950 and 2000. Looking into the new millenium, it is clear that this trend has not changed.

There are 2 major reasons that variable rates almost always outperform fixed rates. The only time fixed rates seem to do better is when there is a major upturn in the rates in the short term, but you still might get into hot water with that.

The first reason is penalties. With the average Canadian only holding a mortgage for 3 years, mortgages are discharged early a lot. With this, a penalty is applied, and the penalty can be substantially higher with a fixed rate as opposed to a variable rate. Sometimes, it is impossible to avoid, but other times you just want to get a lower rate. By having a 3 month interest penalty, it doesn't sting as much to reduce your interest.

For example, let's say you have the option of a 5 year fixed at 3.8% and a 5 year variable at prime minus 0.3%. Prime is at 3.95%, so you would have a rate of 3.65%. There isn't a huge difference between the rates, so fixed seems like a good idea. The problem is that if the bank dropped prime rate to 3.5% and offered a new mortgage at prime minus 1%, you would really want that lower rate. So, you could pay a 3 month penalty, and get it. Whereas the fixed might limit you considerably more.

The other reason is, when do fixed rates outperform variable? Fixed only outperforms variable when there is a sudden, fast upturn in prime rate. if rates stay flat or decline, variable rates outperform.


This has been Mat from Canadian Finance, and if you have any questions or concerns, leave them in the comments below and as always, Thanks for watching Contact Canadian Finance at Contact Canadian Finance at

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