Can you save a year's salary with a variable vs fixed rate mortgage?

More Canadian homeowners than usual are choosing a variable over a fixed rate for more mortgage savings. But is it the right choice for you?

Right now, variable savings are turning heads.

April 12, 2022

That's a lot of savings (a year’s salary for some) over a 5-year mortgage term, based on True North Mortgage’s current variable versus fixed rates. But, it can take a lot of savings to convince homeowners to take on the variable risk — the potential for changing interest rates and payments over their mortgage term.

This savings gap assumes that the difference between rate types will stay the same — it likely won’t. Variable rates (tied to Bank of Canada rate fluctuations) are expected to climb over the next couple of years, which could downsize this savings bonanza by the end of the 5-year term. Yet, fixed rates have also climbed lately, so time will tell how long this wide of a rate spread will continue to hang in there.

What lower variable rates mean for you

  • Save thousands compared to a fixed rate
  • Pay more down on principal
  • Save more on interest costs
  • Payments increase if the prime rate goes up
  • Pay lower penalties should you decide to break your term
  • Need advice on when to switch to a fixed rate

What higher fixed rates mean for you

  • Protected against rate increases
  • Consistent payments during your term
  • Possibly higher monthly payments compared to a variable rate
  • Pay more for interest costs
  • Pay higher penalties should you decide to break your term
  • Need your best fixed rate to save more

Fixed rates are typically higher than variable rates.

That's because you're paying more for the security of knowing that your fixed rate is guaranteed not to go up, and therefore your monthly mortgage payments won’t increase during your term.

But despite the variable risk of increased payments, these variable savings are a little hard for some to ignore and it’s been turning the mortgage-rate choice upside down.

Why is your rate type such a big decision?

Each rate type has a different impact on your mortgage affordability and monthly budget. Typically, most Canadian home buyers prefer fixed rates and the budget certainty they provide. Before the pandemic, about 60 percent of clients went with fixed, and around 30 percent chose variable. Now? Thanks to the increasingly-large spread between these two rate types, over 55 percent have sided with the savings of a lower variable rate. That includes first-time buyers, who face a bigger hurdle to get into over-priced housing markets, and have chosen higher savings over budget predictability.

What rate type is best for you?

Despite the obvious savings right now, it’s not necessarily a slam-dunk decision. The choice can come down to your financial situation, mortgage qualification details, and comfort level with changing rates and payments. Not everyone has the ability to adjust their budget to the varying nature of a variable-rate mortgage. A fixed-rate mortgage may come with a higher rate, but for those whose monthly budget is ‘king,’ the extra cost may be worth their (mortgage) while.

The good news? You don't have to make this decision alone.

A highly-trained mortgage broker in your corner can help you outline all your options, and provide access to several lenders on your behalf to get your best-possible rate — variable or fixed — with a flexible mortgage that fits you. In fact, the right broker can also help you see the fine print of your 'low-rate' mortgage, to ensure it doesn't come with hidden restrictions or fees that end up costing you more than you planned.

While you’re thinking about your rate type, rates may go up.

At True North Mortgage, we have access to several lenders, including our own in-house lender, THINK Financial. We’ve seen several fixed rate increases over the past few weeks, as lenders respond to market conditions. If you contact us today or apply online, we can hold your best rate (for which you qualify) for up to 120 days, to protect against further increases (for a little while, at least).

Take our Compare & Save Calculator for a spin (below) to see your rate savings.

Compare Rates and Save

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Save over 5 years:

$5,464

A lower rate gives you more savings than merely a lower monthly payment. The real savings is both the interest saved, plus the additional principal paid down over the term.

breakdown
The difference in monthly payments would be 41, but the value is considerable more.
4.99%
4.79%
Savings
Total monthly payments
Principal paid over term

Various tools and functions of this website perform calculations and provide cost estimates. These tools are designed for illustrative purposes only and make many assumptions that may not reflect all situations. Please use these tools in collaboration with a True North Mortgage agent. True North Mortgage does not guarantee the accuracy, reliability or completeness of these tools or calculations.

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We’re here to answer all your questions, and hold your best rate.