Again, this depends on the individual or family and their risk tolerance. If you cannot withstand a potential jump, Newman says a fixed rate is likely the smarter choice. He notes that a mortgage should be chosen as part of your financial plan. And you should consider a number of personal factors, such as how long you plan to own the home.
“If you take a long-term fixed rate and end up breaking the mortgage, the penalties could be quite high,” Newman says, adding that clients should map out a few different scenarios and outcomes, then use that information to help make an informed decision.
For example, “If your time horizon involves a potential move in the next few years or your job may be changing, maybe you don’t want a five-year fixed,” he says. “There are [other] factors to analyze—not just the rate.”
From a financial planning perspective, you should weigh the possibility of immediate interest savings—for example, getting a lower fixed rate now versus a higher variable rate that may come down in the future. You should think about your interest-rate risk tolerance—meaning, your comfort with not being able to predict with certainty where rates will be in one, two or five years. And you should consider the length of your mortgage contract, as the penalty for breaking your mortgage could end up being thousands of dollars. (You can do the math using a mortgage penalty calculator.)
Variable rate vs. fixed rate mortgage
Although each situation is unique, we asked Newman to recommend a type of mortgage based on hypothetical profiles of borrowers at various life stages and in different financial situations. What follows is a summary of his recommendations:
| Borrower profile | Mortgage recommendation |
|---|---|
| A young couple with a toddler and another child on the way | Fixed with extended amortization (30-year term) to get the lowest possible payment—catch up on mortgage principal when life settles down |
| An older couple, no kids, low expenses, fixed income and a good amount of savings | • Fixed, if on a fixed income and a very tight monthly budget
• Variable with adjustable payments, pay out the mortgage if needed |
| Experienced property owner, good net worth, reliable income and high risk tolerance for delayed rate drops or even hikes | Variable with adjustable payments |
| A single individual, looking to sell the property in the near future and mortgage is up for renewal shortly | • Convertible fixed-rate mortgage (open mortgage after six months), so you can reassess your options, such as extending the term, selling the property or switching lenders at the six-month mark
• Variable rate could work, too |
| Individual or family, expecting a large lump sum of money (say an inheritance, sale of another asset) | • Variable may be a good fit, paying at most 3 months’ interest for paying off the mortgage early
• Open variable, as it has no penalty, but the rate will be higher |
| Couple planning divorce, mortgage is up for renewal, property will be sold or bought out by one spouse | Variable (open, closed or home equity line of credit) to avoid the big penalties that can occur with breaking a fixed-rate mortgage |
| Individual or family, extremely risk tolerant, goal to pay down mortgage fast and can withstand rate fluctuations | Variable, as rates aren’t a risk, but with a fixed-payment variable option, should rates drop, the portion of the payment that goes toward the principal will increase |
What to do before getting a mortgage or renewing in 2024
Getting a mortgage is as personal as creating a budget, setting up your legal will and power of attorney documents or developing an estate plan—it’s never a one-size-fits-all solution. It often helps to speak to an expert who will walk you through various factors and explain the risks and benefits of each option in detail. A mortgage broker is one great option, but at minimum, you should thoroughly compare mortgage rates and term lengths in order to make an informed decision.
As Newman says, finding the “right” mortgage isn’t just about getting the lowest interest rate—it’s about choosing the mortgage and timeline that best reflects your needs, goals and financial situation. This advice applies to both first-time home buyers and those higher on the real estate ladder, and could result in an expert recommending a fixed or variable rate mortgage depending on your unique profile.
Rates are expected to go down—and things are looking up
After the financial impact of a pandemic, the ongoing effects of inflation and a stressful year or two for mortgage holders, Canadians have reason to feel more optimistic.
