Variable or Fixed Mortgage Rates

5-year fixed vs. variable mortgage rates over time

Variable rates tend to be slightly lower than fixed rates at any given time, because they are inherently less risky for lenders. However, this is not always the case, as illustrated in the chart below. You'll notice that in late 2019, 5-year variable rates were higher than fixed rates, while towards the end of 2022, the spread between 5-year variable and fixed rates was virtually non-existent. For the whole of 2024, year-to-date, variable 5-year variable mortgage rates have been noticeably higher than 5-year fixed rates.  

5-year fixed vs. variable mortgage rates (interactive graph) 

Fixed and variable mortgage rates compared

The table below lays out some of the key differences as well as the pros and cons of fixed and variable mortgage rates.

Popularity of fixed versus variable mortgage rates

Fixed mortgage rates are historically the more popular of the two rate types. However, for the majority of 2021 and into 2022, variable mortgage rates were significantly lower than fixed rates As a result, variable-rate mortgages surged in popularity. In the second half of 2021, according to the Canada Mortgage and Housing Corporation (CMHC), over 50% of new mortgages and mortgage renewals were variable-rate mortgages. Moreover, according to a report published by Mortgage Professionals Canada, variable-rate mortgages accounted for 25% of Canadian mortgage debt by the end of 2022, as compared to just 20% in 2019 (meanwhile, at the end of 2022, 69% of Canadian mortgage-holders had a fixed-rate mortgage). However, in the wake of eight successive rate hikes by the Bank of Canada between March 2022 and January 2023, variable mortgage rates went soaring and, consequently, variable mortgage rates plunged in popularity. The same Mortgage Professionals Canada study found that 3 in 10 variable-rate mortgage holders were actively considering converting to a fixed rate, while another 3 in 10 had also considered that option but decided against it. In 2021 and 2022, variable mortgage rate inquiries to Ratehub.ca made up 23% and 26% of all mortgage rate requests, respectively. From January to December 2023, variable mortgage rate requests accounted for just over 5% of rate requests made to Ratehub.ca. According to the 2024 CMHC Mortgage Consumer Survey, 23% of consumers opted for variable-rate mortgages, down from 27% in 2023. Fixed-rate mortgages, on the other hand, accounted for 69% of all mortgages contracted in 2024, according to the same survey. The remainder were mixed fixed and variable-rate mortgage products. 

Comparing fixed and variable mortgage rates

You can think of the difference, or spread, between variable and fixed mortgage rates as the price of insurance that lending rates will not increase, more or less. When interest rates are low and are not expected to fall further, it is generally advised to lock in a fixed rate, as variables rates will, at best, stay the same, or increase. On the other hand, if you expect interest rates to fall with some certainty, then a variable rate is preferred, as you will be able to absorb the benefit of paying lower interest. Similarly, if the difference between the variable rate and the fixed rate is significant, it may not be worth paying the premium for the stability protection of a fixed rate.

Fixed and variable mortgage rate drivers

By and large, fixed mortgage rates follow the pattern of Canada Bond Yields, plus a spread, where bond yields are driven by economic factors such as unemployment, export and inflation.

Variable mortgage rates are driven by the same economic factors, except variable rates fluctuate with movements in the prime lending rate, the rate at which banks lend to their most credit-worthy customers. Variable mortgage rates are typically stated as prime plus/minus a percentage discount/premium. For example, a variable rate could be quoted as prime - 0.8%. So, when the prime rate is, say, 5%, you will pay 4.2% (5%-0.8%) interest.

The Bank of Canada adjusts the prime rate depending on the state of the economy, as determined by the economic factors introduced above. Together, combinations of unemployment, export, and manufacturing values shape the inflation rate. Generally speaking, when inflation is high, the Bank of Canada will increase the prime rate to make the act of borrowing money more expensive. Conversely, when inflation is low, the Bank of Canada will decrease the prime rate to stimulate the economy and improve the attractiveness of borrowing.

In terms of the discount/premium on the prime rate applied to variable rates, mortgage lenders set this based on their desired market share, competition, marketing strategy and general credit market conditions. These are the same factors that drive the spread between lenders' fixed mortgage rates and bond yields.

References and notes

1. Annual State of the Residential Housing Market in Canada, Mortgage Professionals Canada, 2021
2. Residential Mortgage Industry Report, Canada Mortgage and Housing Corporation, Spring 2022
3. State of the Housing Market: 2022 Year-End Consumer Survey & Outlook, Mortgage Professionals Canada, 2023
4. 2024 Mortgage Consumer Survey, CMHC, 2024