Newer buyers prefer a fixed term – but other borrower types are ready to take the plunge on variable
There’s no easy answer to the age-old question of whether homebuyers should opt for a fixed or variable mortgage rate in Canada – but as political and economic storm clouds continue to gather, first-time homebuyers appear to be favouring the stability and relative peace of mind offered by shorter-term fixed rates.
That’s according to Ottawa mortgage broker Chris Allard (pictured top), of Smart Debt Mortgages, who told Canadian Mortgage Professional that while the choice still depended largely on borrowers’ risk tolerance and individual financial circumstances, locking in a mortgage rate seemed to be a priority for many newer buyers.
Speculation around a possible impending recession and uncertainty about the future of Donald Trump’s threatened tariffs on Canadian imports to the US may be a strong reason for that sentiment.
But variable rates are also still a popular option among other borrower types. “Most borrowers who are very financially comfortable are going variable with the understanding that some of the projections still show variable rates on the way down, and there are more perks such as smaller mortgage penalties if they need to break the contract and switch from a variable to fixed without a penalty,” Allard said.
“These are people that are either very financially stable or understand more the mortgage market. What I’d say is for many of the first-time homebuyers, they’re still leaning towards the fixed rates and they’re kind of going, ‘You know what? I don’t think I understand this enough to really make a real educated decision and therefore I’m going to pick what is the safe bet now.’”
With economic concerns dominating, Dwight Trafford, principal broker at Rock Capital Mortgage, warns Canada may need to shift spending away from housing if tensions escalate.https://t.co/LRFQMKcH6d
— Canadian Mortgage Professional Magazine (@CMPmagazine) February 25, 2025
Mortgage professionals could debate what the safest option is, Allard added, with the Bank of Canada’s overnight rate – which leads variable mortgage rates – expected to tumble further before the end of the year.
The central bank looks set to keep rates on hold in March, although markets expect it to make more cuts before 2025 is out.
“But many of the first-time homebuyers, I find, are opting to take a three-year fixed rate,” he said. “They’re not willing to commit to what five years looks like.”
Variable rates still viewed warily by borrowers who remember 2022
Borrower sentiment surged towards variable rates at the height of the COVID-19 pandemic, when an economic crisis spurred the central bank into slashing its trendsetting rate to a rock-bottom 0.25%.
That saw variable rates plunge – but fixed options shot back up in popularity after 2022, when a series of Bank of Canada rate hikes followed a big spike in inflation.
The experience of borrowers who saw costs on their variable-rate mortgages balloon after the pandemic means plenty are still regarding those options with caution, even if others are prepared to take the plunge.
“Everyone knows someone who got burnt by taking the variable and everyone knows someone who’s an adamant believer in variable rates,” Allard said. “And there are still a lot of questions about those rates and there’s still some appetite.
“I think it’s just a matter of whether someone’s willing to pull the trigger on taking a bit of risk for some potential savings – which is the same as always. I just think it may be a bit more of a complicated dynamic today.”
Fixed-variable rate gap continues to narrow
What might be making the decision an even bigger dilemma for borrowers is the fact that the gap between fixed and variable rates has narrowed substantially of late, a noted contrast to previous cycles when one rate type would fall at the expense of the other.
“Obviously every lender has slightly different rates,” Allard said, “but in the grand scheme of things with fixed and variable, all the rates kind of look very similar right now. And I think that’s added to the complexity of it all – because if there’s a bigger gap, decisions become easier.
“But when all the rates start to look the same, it makes it very challenging for a borrower to really understand and make an educated choice on what they feel is best.”
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