"Should I go fixed or variable?"
It's the question I get asked more than any other. Most people expect a one-word answer. Mine usually starts with a question back, because fixed versus variable isn't really a guessing game about where rates are headed. It's a strategy we solve for together, based on your cash flow and where you are in life.
I'm not saying variable is always the answer. I'm saying that right now, with a gap of almost 1% between typical fixed and variable rates, that gap can be a tool. Used well, it can help you pay off debt, pay down your mortgage faster, or start building wealth.
The first question I ask
Would a change in your mortgage payment cause you stress, or squeeze your budget?
Your answer sends us down one of two paths.
Path 1: "Yes, a changing payment worries me"
This is where most people land, and it's where I think a broker can add the most value. Here's the approach I walk clients through.
Take the variable rate, but budget as if you'd taken the fixed.
- We set you up with a variable-rate mortgage.
- We work out what your payment would have been at today's five-year fixed rate.
- Every month, the difference between the two payments goes somewhere useful, like a TFSA, an RRSP, a high-interest savings account or a simple investment.
Your budget feels the same as if you'd locked in. The difference is that the gap is working for you instead of going to the lender.
What that looks like in numbers
Here's an example on a $500,000 mortgage with a 25-year amortization. These rates are for illustration only, not a quote or a prediction.
Set that $243 aside every month and after one year you've built up about $2,900.
You don't need big investment returns for this to work. The money doesn't have to outperform anything. It just has to sit there, ready.
"But what if rates go up?"
That's the right question, and here's the part people find surprising.
As the variable rate rises, the gap shrinks, so the amount you set aside each month gets smaller. If the variable rate climbs past the fixed rate you could have had, the money simply flows the other way: you draw on what you've saved to cover the difference.
In our example, the variable rate would have to rise almost 0.9% before you paid more than the fixed payment at all. And if it went to 4.85%, you'd be paying about $73 a month more than the fixed payment. The $2,900 you saved in that first year would cover that difference for more than three years.
In other words, every month spent below the fixed rate builds a cushion for the months you might spend above it.
Your "volume dial"
The fixed-rate payment is your starting target, but it doesn't have to stay put. Think of it as a volume dial we can turn up or down as your life changes. The gap can go towards:
- Paying off credit cards or a line of credit. Clearing high-interest debt is often the best return you'll get anywhere.
- Paying down your mortgage faster. Many lenders let you raise your payment or make lump-sum prepayments. Paying at the fixed-rate level on a variable mortgage can take time off your amortization.
- Building long-term wealth. A TFSA or RRSP contribution every month adds up over a five-year term.
- A safety buffer. Simply holding the money so a rate increase never catches you off guard.
Which one fits depends on where you are. If you're building wealth or working your way out of debt, this approach can turn your mortgage into a tool instead of just a bill.
Two things to know about variable mortgages
- Not all variable mortgages work the same way. With some, your payment changes when the prime rate changes. With others, your payment stays the same and more or less of it goes to interest. I'll explain which kind you're getting and what happens in each case if rates rise.
- You can usually lock in. Most variable mortgages let you convert to a fixed rate during the term if you decide you want certainty. The fixed rate you lock into will be whatever the lender offers at that time, not today's rate.
Path 2: "No, my payment isn't a concern"
If a changing payment doesn't worry you, you're probably in a different stage of life. You may be focused on protecting the wealth you've built rather than paying down debt, and you likely don't carry much on credit cards or lines of credit.
For you, there are two good options, and the right one comes down to personality:
- Take the variable and live with the changes. Pay the lower payment, ride out the ups and downs, and stay in touch with your mortgage broker so we can talk about locking in if it ever makes sense.
- Set it and forget it. Even with a big gap, some people would rather not think about their mortgage at all for five years. A fixed rate gives you that.
So I'll ask: do you want to set it and forget it? If your answer is "I already do that with a variable," then a variable rate is likely a great fit for you.
Why this is better than just chasing the lowest rate
A low rate on its own is just a number. A low rate with a plan behind it can help you pay off debt, own your home sooner or grow your savings.
That's the difference between someone who hands you a rate and someone who helps you use your mortgage as a tool. My goal is for you to be life rich, not house poor, and choosing fixed or variable is one of the best chances to set that up.
The rates and payments on this page are examples only, not a rate quote, an offer or a prediction of future rates. Payments are calculated on a $500,000 mortgage with a 25-year amortization and semi-annual compounding, and are rounded. Actual rates, payments, prepayment privileges and conversion options depend on the lender and your approval. Investment returns are not guaranteed. This page is general information, not financial or investment advice.