Shakespeare might have thought “to be or not to be” was the ultimate question, but he wasn’t living in 2025 trying to afford groceries while minimizing interest charges and maximizing mortgage payments.

We’re tackling a modern dilemma: “To get a variable or fixed rate on my mortgage?” Not as poetic, but way more practical. Let’s dive in.

Understanding the Basics of Mortgage Payments

Every mortgage payment has two components: principal and interest. Your choice between a fixed or variable mortgage will impact the amount you pay towards principal and interest. Today, most variable rate mortgages are priced higher than fixed rates at almost any term, but does it make sense to pay a higher interest rate for a possible rate decrease in the future.

Most individuals we help at The Mortgage Centre are now selecting fixed rate mortgages if they are renewing. Although fixed rates are more common, it’s always good to get some background information on variable rate mortgages.

Variable Rate Mortgages

Variable rate mortgages come in two main forms:

  • Fixed Payment Variable Mortgage – You have a set monthly payment, but the portion that goes toward principal vs. interest fluctuates. When rates go up, more of your payment goes toward interest, slowing down how quickly you pay off your mortgage. When rates go down, more goes toward the principal, helping you pay off your loan faster.
  • Adjustable Payment Variable Mortgage – The total mortgage payment fluctuates based on interest rate changes, ensuring the mortgage is paid off within the original amortization schedule. The portion of your payment allocated to interest and principal will shift as rates change.

Variable mortgages introduce an element of unpredictability, which some borrowers are comfortable with. Others prefer the security of knowing exactly what their payments will be.

Fixed Rate Mortgages

A fixed-rate mortgage means your interest rate and monthly payments remain the same throughout your term. This stability can be crucial for those who prioritize predictability in budgeting, mental well-being, or long-term financial planning. If the idea of fluctuating payments makes you uneasy, or if you want to avoid worrying about interest rate changes, a fixed-rate mortgage could be the right choice.

The Interest Rate Factor

The Bank of Canada (BofC) sets the overnight lending rate, which influences the Prime Rate set by different banks/financial institutions. Variable mortgage rates are typically based on Prime ± a lender-specific adjustment. There are eight key BofC announcements each year that can result in rate changes (or no changes at all). You’ve probably seen me cover these on social media (if not, I’d love for you to follow along!)

During the pandemic, the BofC lowered rates to 0.25% to stimulate borrowing. Rates began increasing in 2022 due to inflation, reaching 5% by mid-2023 before the BofC started cutting them in 2024. As of March 12, 2025, we’re at an overnight lending rate (sometimes referred to as the policy rate) of 2.75% – while the Prime Rates at most financial institutions are 4.95% with six more rate decisions coming this year.

Risks to Consider

There are risks with both variable and fixed rates for your mortgage. With a fixed rate, the risk is that if rates drop, you will have a higher payment than what is available on the market. You’d also likely incur a penalty to break the fixed rate term to capitalize on any decreases. With a variable rate, the risk is that changing rates could increase the amortization of your mortgage or with a floating payment mortgage – your payment will go up. We also discussed the risk of Bank of Canada announcements indirectly changing your rate and therefore payment, impacting your budget and cash flow.

And one final potential risk is, if rates go up enough, it may trigger the need for a lump sum payment to your lender.

2025: What’s Next?

With global uncertainty it’s difficult to predict what will happen to interest rates. Current inflation in February 2025 as measured by the Consumer Price Index rose to 2.6%. Will this mean that the overnight rate will increase or decrease?

Most economists are predicting that there’s still room for the BofC to cut rates. Keep in mind that BofC policy rate does not have a direct impact on fixed rate mortgages, as fixed rates are priced off of the bond market– which doesn’t necessarily follow similar trends as the overnight lending rate.

Impact on Your Mortgage: If you have a variable mortgage, your rate is based on your lender’s Prime rate, which is influenced by the BoC policy rate. Your mortgage rate is typically Prime ± a lender adjustment. If the Prime rate is 6% and your lender offers Prime – 0.50%, your mortgage rate would be 5.50%.

  • With a fixed payment variable mortgage, more of your payment goes toward principal.
  • With an adjustable payment variable mortgage, your monthly payment decreases.

If you have a fixed-rate mortgage, your rate and payments remain unchanged during your term. This stability is why many borrowers prefer fixed rates, even if they sometimes come with slightly higher initial rates. Fixed rates are influenced by bond market trends rather than the Bank of Canada’s policy rate directly.

Which Mortgage is Right for You– Fixed or Variable Rate?

There is no universal right answer—only the best choice for your financial situation, risk tolerance, and future plans. As your mortgage professional, I’d love to walk through your mortgage with you and discuss:

  • The pros and cons of fixed vs. variable for your specific needs.
  • How to budget for worst-case scenarios.
  • Whether breaking your current mortgage to switch makes sense.
  • Economic implications of switching between a variable and fixed rate.
  • If adjustments at renewal would benefit you.

Confused or not sure what to do? Contact us anytime! I’m here to provide guidance, not pressure. Let’s find the best mortgage strategy that works for you!