As the Canadian mortgage market continues to adjust following significant interest rate shifts, homeowners and buyers are faced with a tough question for 2025: Should you choose the potentially budget-friendly variable rate or play it safe with a fixed rate?
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Variable rates, which have declined by 1.75% since mid-2024, remain higher than fixed rates for now. However, many Canadians are cautiously optimistic that variable rates will drop further. The decision often boils down to two mindsets:
- FOMO (Fear of Missing Out): The possibility of missing out on savings if variable rates drop significantly during your term.
- JOMO (Joy of Missing Out): The peace of mind that comes with locking in a fixed rate and avoiding the uncertainty of fluctuating payments.
To help you make an informed choice, let’s explore the benefits, risks, and future outlook of variable and fixed rates in 2025.
A Warning About Canadian Fixed Mortgage Rates
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The Case for Variable Rates: Flexibility and Potential Savings
Variable mortgage rates, tied to the Bank of Canada’s prime rate, have historically offered significant savings over fixed rates. As prime rates drop, homeowners with variable-rate mortgages may enjoy immediate benefits.
Benefits of Choosing Variable Rates
- Lower Payments with Rate Drops:
Variable rates respond directly to prime rate changes. For those with adjusting-payment variable mortgages (ARM), every rate drop translates into lower monthly payments. - Accelerated Amortization:
If you have a fixed-payment variable mortgage (VRM), rate reductions apply directly to your principal, helping you pay off your mortgage faster. - Lower Penalties:
Exiting or switching a variable-rate mortgage usually comes with lower penalties than breaking a fixed-rate mortgage. - Option to Lock into Fixed Rates:
Variable-rate mortgages allow you to convert to a fixed rate at any time without penalty, offering a safety net for rate-conscious borrowers.
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What’s the Future for Variable Rates?
Prime rates, which peaked at 7.20%, have already fallen by 1.75%. Dan Eisner, CEO of True North Mortgage, predicts a further decline of 2.50% by the end of 2025, bringing the prime rate to 4.70%.
In this scenario:
- Lenders might offer even better variable rate discounts, increasing the appeal of these mortgages.
- If a recession occurs, variable rates could drop faster, creating additional savings opportunities for borrowers.
Savings Potential Example:
- For a $500,000 mortgage with a 25-year amortization, choosing a variable rate at 4.35% today could save over $6,600 compared to locking in at a 5-year fixed rate of 4.24%.
- Payments may be slightly higher initially with a variable rate, but projected declines could reverse this trend, offering significant savings over the term.
The Case for Fixed Rates: Stability and Peace of Mind
While variable rates have regained some popularity, fixed rates remain the go-to choice for many borrowers seeking financial certainty.
Why Choose a Fixed Rate in 2025?
- Budget Predictability:
Fixed rates provide stable payments, allowing you to plan your finances without worrying about market volatility. - Protection Against Inflation Risks:
If inflation spikes unexpectedly, fixed rates shield you from rising mortgage costs that could occur with a variable rate. - Competitive Rates:
Fixed rates have already dropped ahead of expected prime rate cuts, making them more attractive for those looking to lock in lower costs now.
Short-Term Fixed Rates: Bridging the Gap
For those hesitant to commit to a 5-year fixed rate while waiting for variable rates to drop further, shorter-term fixed rates (like 3-year terms) offer a middle ground. These terms provide stability and flexibility, positioning borrowers to take advantage of lower rates sooner.
Choosing the Right Option: Risk Tolerance and Financial Goals
The right mortgage choice in 2025 will depend on your personal circumstances and risk tolerance:
- Choose Variable If:
You’re comfortable with some risk, value flexibility, and believe prime rates will drop significantly during your term. - Choose Fixed If:
You prioritize stability, prefer predictable payments, and want to lock in current low rates without worrying about future rate fluctuations.
Mortgage Trends to Watch in 2025
Recent trends suggest that variable rates are gaining favor:
- In October 2024, 31% of True North Mortgage clients chose a 5-year variable rate, slightly outpacing the 28% who chose a 5-year fixed rate.
- This shift reflects growing confidence in declining prime rates.
During normal economic conditions, fixed rates traditionally dominate, with approximately 60% of borrowers opting for 5-year terms. However, as the rate environment evolves, shorter terms and variable products may see increased adoption.
Expert Advice: Tailoring Your Mortgage to Your Needs
Whether you lean toward FOMO or JOMO, finding the best mortgage option requires expert guidance. At True North Mortgage, our brokers provide personalized advice, ensuring you get the lowest rates and the most suitable product for your financial situation.
Conclusion: FOMO or JOMO — Which Will You Choose?
As 2025 begins, both variable and fixed rates offer unique advantages. By understanding your financial goals and risk tolerance, you can confidently navigate the mortgage market and secure the best deal for your future.
Have questions? Our team is here to help, online or in-person, across Canada. Let us make your mortgage journey seamless and stress-free.
Ready to make a decision? Contact us today for expert guidance and unbeatable rates!
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