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Variable or Fixed? an update on how to choose.

Variable rate mortgage


The debate over fixed vs variable never seems to end.   For the past 5 years, the Federal govt and the BIG SIX BANKS have been doing everything in their power to force us into choosing a 5 year Fixed rate.    The govt says it gives us security and protection against the anticipated interest rate hikes.   BANKS jumped on this bandwagon because 5 yr fixed is the most profitable mortgage product.. and with fixed rates hovering at 3.00% for the last 3 years, it’s been an easy sell.

On the surface, it’s not bad advice.    Fixed rates were supposed to go up.   The spread between Fixed and Variable has been less than 1.00% over the last 3 years.     My rule of thumb is that Variable rates should be 1.00% lower than 5 yr fixed in order to benefit from the possible rate fluctuations.   So naturally, 5 yr fixed was a better choice.


Well, not really.  If you chose a Variable rate at any time during the last 12 years, you would be a clear winner.  In fact, if you chose a Variable rate at any time over the past 30 years, you would be a winner.   That’s right, your overall average rate would be lower than compared with the overall average 5 yr fixed rate.

Having said all that, when the spread dropped to 0.50%, it’s hard for me to recommend choosing Variable for everyone.   That’s because we need to remember the emotional side of things.   If you can’t sleep at night because you notice every article or report about the impending rate hikes, then go with a Fixed rate.  I think there is something to be said for having peace of mind.  You just need to understand the cost and you need to be in the right product.

But if you understand that current economic conditions and forecasts by the Bank of Canada are calling for rates to remain low for some time to come, then consider choosing a Variable rate.    Saving 0.50% adds up to around $1,100 per year on a $300,000 mortgage.  So choosing a Variable can and still does make sense.


There’s another phenomenon.   New NO FRILLS Variable and Fixed rate products have come to the Canadian market.   You won’t see them advertised as ‘NO FRILLS’ products.  The products typically carry a slightly lower rate and attract a lot of attention.  However, these products should be avoided.   Saving 0.05% or 0.15% isn’t gonna make or break you.   But the restrictions, limitations and inflated penalty calculations will.  In the end, these products will usually end up costing you more down the road.  Signing a mortgage contract isn’t something to be taken lightly.

One of the biggest mysteries about mortgages was how the penalties were calculated.   In recent years, we’ve seen them skyrocket to $30,000, $40,000 and more.  And this is being charged by the BIG SIX BANKS… not some obscure financial institution.    If you aren’t sure how a penalty is calculated, ask questions.. and if you are still unsure, speak with an experienced Mortgage Broker.

One of the most important features to have in a Variable rate mortgage is the option to lock into the BEST discounted fixed rate that the lender has to offer at the time of lock in.   Again, this is something most of us don’t think about, but it’s critical.


Variable rate is still the clear winner even with fixed rates being in record low territory.    Incredible to say but it’s true.  Just be ready… you may need to lock into a fixed rate at some point… and you better have the option to lock into the BEST discounted rate… don’t be counting anything your Banker or Broker promised.   Get it in writing.  We may be making that call in the future.  For now, it doesn’t appear to be urgent.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114

Steve Garganis View All

As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.

3 thoughts on “Variable or Fixed? an update on how to choose. Leave a comment

  1. Good article, Steve! About the variable rates, in the last 5 years, how high have the rates gone up to?
    Also, is there a “ceiling” for how high the variables rates can go to? I’m inclined to get into my first mortgage and get a variable rate for the first 5 year-term.

    • Hi Filipe,

      Variable rate means your rate of interest can change according to the Bank Prime rate. Once your mortgage closes, your price is set for the next 5 years.

      6 years ago, the world suffered one of the worst global recessions in history due to US sub-prime mortgage crisis caused by greedy and unethical investment bankers packing and selling $$billions of low quality, high risk mortgages disguised as low risk, high quality mortgages. The result was losses in the $$trillions due to global exposure to this massive fraud.

      During this time variable rate pricing changed from prime less 0.80% to prime plus 1.00% in November 2008, back down to prime less 0.75% in March 2011, up to prime less 0.10% in February 2013, and back down to primes less 0.65% today.

      Bank Prime rate dropped to an all time historical low in 2009 to 2.25%. It went up to 3.00% in Sept 2010 and hasn’t changed.

      To answer your question, depending on when you entered into your mortgage, your rate would be anywhere from 2.15% to 2.90%.

      There is no ceiling on the rate. However, the economy is sluggish. That means bank prime is forecast to remain low for the next few years and any increases will be gradual, if any at all.

      Which product is best for you? It depends on many things. Risk tolerance, budget, how long you intend to keep the home, etc.

      Not all mortgages are alike. There are several things that make some variable rate products good or bad. Let me if you’d like help to better understand your choices.

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