When it comes to choosing between a fixed or variable mortgage rate in Canada, the decision is never simple. The economic and political landscape has been uncertain in recent years, leading many first-time homebuyers to lean toward the relative stability of shorter-term fixed mortgage rates. While the choice ultimately depends on individual financial situations and risk tolerance, Ottawa-based mortgage broker Chris Allard from Smart Debt Mortgages points out that many new buyers seem to prioritize the peace of mind a fixed-rate mortgage can offer.
This shift in preference comes against a backdrop of potential economic turbulence. The looming possibility of a recession, along with concerns over US tariffs on Canadian imports, has led many to favor locking in their mortgage rates. Allard highlights that despite the appeal of fixed rates, the decision still hinges on a buyer’s financial outlook. For many first-time homebuyers, a fixed rate represents a safer bet in the face of such uncertainty.
However, variable rates continue to be popular with other segments of borrowers. According to Allard, financially secure borrowers are still drawn to variable rates due to the potential for lower rates in the future and the added flexibility they provide. In particular, these borrowers can benefit from smaller mortgage penalties should they decide to switch from a variable to a fixed rate, without incurring significant costs. This option remains appealing for those who have a good understanding of the mortgage market or those who are more financially stable.
“All things considered, first-time buyers seem more cautious,” Allard said. “They don’t fully grasp the intricacies of the market, so they opt for what feels like the safer choice — a fixed rate.”
Mortgage professionals have long debated the safest approach, with the Bank of Canada’s overnight rate—a key driver of variable mortgage rates—expected to decrease further by the end of the year. While the Bank of Canada is likely to hold rates steady in March, markets expect additional rate cuts before 2025. This creates a situation where some borrowers may feel more comfortable taking on a variable rate in the hopes of long-term savings.
That being said, many first-time buyers aren’t willing to commit to a five-year fixed-rate mortgage just yet. Instead, they tend to gravitate toward three-year fixed rates, which provide stability without a long-term commitment.
The sentiment around variable rates has shifted significantly since the onset of the COVID-19 pandemic. When the central bank cut its key rate to a historic low of 0.25%, variable rates plummeted, making them a more attractive option for borrowers. However, the experience of those who saw their mortgage payments rise dramatically when interest rates surged in 2022 has left a lasting impact on many. This caution still lingers, even as some are willing to embrace the potential savings of a variable rate.
“Everyone knows someone who was burned by a variable rate mortgage, just as there are others who swear by them,” Allard said. “The challenge lies in whether someone is ready to take on the risk for the potential reward. Today’s dynamic makes the decision even more complex.”
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Another key factor making the decision harder for borrowers is the narrowing gap between fixed and variable mortgage rates. In the past, these rates often moved in opposite directions, making it easier for borrowers to choose one over the other. However, as Allard notes, the rates are much more comparable now, adding another layer of difficulty for those trying to make an informed choice.
“With the rates looking similar across both fixed and variable options, it’s harder for borrowers to discern which is truly the best choice for them,” Allard said. “In the past, a bigger gap made the decision clearer, but now it’s much more challenging.”
In conclusion, as political and economic uncertainties persist, the choice between fixed and variable mortgage rates in Canada remains a complicated decision for homebuyers. First-time buyers, in particular, seem to be opting for the relative safety of fixed rates, while more financially secure borrowers continue to explore the flexibility and potential savings offered by variable rates. As the market continues to evolve, the decision may depend more on personal financial outlooks and risk tolerance than ever before.
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