Should I take a fixed or a variable rate?
Pick on your tolerance for the payment changing, not on a forecast. Fixed buys certainty and an expensive break penalty; variable is cheaper to break and moves with the Bank of Canada.
Anyone who tells you which will win is guessing. What is knowable is how each behaves.
Fixed: the payment does not move for the term. The break penalty is calculated by interest rate differential, which at some lenders uses posted rates and can run to five figures. Breaking a mortgage before the end of the term is ordinary rather than exceptional, since selling, refinancing and switching lenders all do it, so treat that penalty as a cost you may well pay. We are not quoting a share of borrowers who break early, because the figures circulated for that come from lender marketing and we have no dataset behind them.
Variable: the rate tracks prime. On an adjustable mortgage the payment moves with it; on a standard variable the payment is fixed and the split between principal and interest moves, which can hit a trigger rate where the payment must rise anyway. The break penalty is usually three months' interest, which is far cheaper.
The practical test: model the variable at two or three points above today's rate and check whether you could pay it without changing anything important. If you could not, take fixed and stop reading forecasts.
What it depends on
- the spread between fixed and variable when you sign
- how likely you are to break the mortgage early
- how much payment variation your budget can absorb
Answer it with your own numbers
You will need: mortgage amount, amortization, both rates.
Model both, including a rate shockNext questions
What is a mortgage penalty and how is it calculated?
On a variable it is normally three months' interest. On a fixed it is the greater of three months' interest and an interest rate differential, and the way your lender calculates that differential can change the bill by thousands.
Canada-wide
When does it make sense to refinance?
When the interest you save over the remaining term exceeds the penalty plus legal and appraisal costs, or when you need to consolidate higher-rate debt. Do the arithmetic; do not refinance on a feeling that rates look better.
Canada-wide