The Core Question
Variable rates are almost always lower than fixed rates when you sign. The question is whether the savings during low-rate periods outweigh the cost and stress during rate hikes — and whether you can afford the payments if rates rise.
Variable vs. Fixed: The Two Types of Risk
| Risk type | Variable rate | Fixed rate |
|---|---|---|
| Payment certainty | No — payments may rise (ARM) or amortization extends (VRM) | Yes — payments guaranteed for term |
| Interest cost risk | Rate could rise above fixed | None during fixed term |
| Break penalty | Small (3 months interest) | Large (often IRD — can be thousands) |
| Locked out of refinancing | No — cheap to exit | Yes — IRD penalty can trap you |
| Renewal risk | Yes — rate could be high at renewal | Yes — same issue at renewal |
ARM vs. VRM: Two Different Variable Products
| Feature | Adjustable Rate Mortgage (ARM) | Variable Rate Mortgage (VRM) |
|---|---|---|
| Payment adjusts when prime changes | Yes | No |
| Amortization stays constant | Yes | May extend if rates spike |
| Negative amortization possible | No | Yes, if payments don’t cover interest |
| Payment shock when rates rise | Immediate | Deferred until trigger rate or renewal |
Most major Canadian banks offer VRM-style products; many monoline lenders offer ARM-style. Know which you have before comparing rates.
Historical Performance of Variable vs. Fixed in Canada
Research by Dr. Moshe Milevsky (York University, widely cited in Canadian financial planning) analyzed Canadian mortgage data and found:
- In approximately 88% of historical 5-year terms, the variable rate borrower paid less total interest than a comparable fixed rate borrower
- The outperformance averaged roughly 1–1.5% annually on the outstanding balance in low-rate environments
- The 12% of terms where fixed outperformed were concentrated in rising-rate environments — most recently 2022, when the Bank of Canada raised rates from 0.25% to 4.25% in 12 months
2022 was the most significant exception in decades. Variable rate borrowers who entered at rock-bottom rates in 2020–2021 saw prime rate climb from 2.70% to 7.20% — many faced payment increases of $500–$1,500/month on a $500,000 mortgage.
Cost Comparison Example
Assume a $500,000 mortgage, 25-year amortization.
Scenario A: Rates stay flat or fall
| Variable (prime − 0.90%) | Fixed (5-year) | |
|---|---|---|
| Starting rate | 5.55% (prime 6.45% − 0.90%) | 5.89% |
| Monthly payment | ~$3,075 | ~$3,200 |
| 5-year interest | ~$125,000 | ~$136,000 |
| Variable savings | ~$11,000 |
Scenario B: Rates rise 2% over 2 years then stabilize
| Variable | Fixed | |
|---|---|---|
| Starting payment | ~$3,075 | ~$3,200 |
| Payment at peak rate | ~$3,650 | ~$3,200 (unchanged) |
| 5-year interest | ~$137,000 | ~$136,000 |
| Variable savings | ~$1,000 (small) |
Scenario C: Rates rise 3%+ quickly (2022 repeat)
| Variable | Fixed | |
|---|---|---|
| Starting payment | ~$3,075 | ~$3,200 |
| Payment at peak | ~$4,000+ | ~$3,200 |
| 5-year interest | ~$148,000 | ~$136,000 |
| Fixed saves | ~$12,000 |
The Break Penalty Advantage of Variable Rate
This is the most underappreciated benefit of variable rate mortgages: the exit cost.
| Situation | Variable penalty | Fixed penalty |
|---|---|---|
| Sell home mid-term | 3 months interest (~$5,000–$8,000) | IRD can be $15,000–$40,000+ |
| Refinance to lower rate | 3 months interest (usually cheap) | IRD — often makes refinancing uneconomic |
| Divorce or life change | Same low penalty | Large penalty can complicate settlement |
If there is any chance you will need to break your mortgage before renewal, the variable rate’s 3-month interest penalty is significantly more flexible than the fixed rate’s IRD penalty.
Who Variable Rate Is Right For
| Profile | Fits variable rate? |
|---|---|
| Stable income well above mortgage payments | Yes — rate increases are manageable |
| May sell or refinance within the term | Yes — low break penalty matters |
| Financially sophisticated, can monitor rate trends | Yes |
| Building an emergency fund / extra cash available | Yes — buffer for payment increases |
| Risk tolerant and history-aware | Yes |
Who Should Choose Fixed Rate
| Profile | Stick to fixed rate |
|---|---|
| Buying at the top of what you qualify for | Yes — no room for payment increases |
| Fixed income (retiree, disability) | Yes — certainty is essential |
| High anxiety about financial uncertainty | Yes — peace of mind has real value |
| Short-term savings not worth the risk concern | Possibly — current fixed/variable spread matters |
| First-time buyer, already stretched | Likely yes |
The Spread Is What Matters Most
The decision should be driven by the spread between variable and fixed rates at the time you sign:
| Spread (Fixed minus Variable) | Implication |
|---|---|
| 0.10–0.30% | Barely worth the variable risk — consider fixed |
| 0.50–0.75% | Moderate advantage to variable — worth considering |
| 1.00%+ | Strong historical advantage to variable; variable likely wins unless large rate hike occurs |
| Variable actually higher than fixed | Choose fixed — no reason to take rate risk |
Always compare with your own numbers. One rate point on a $600,000 mortgage is about $6,000 per year — real money.