There are many people, both mortgage professionals and borrowers alike, who will swear that variable-rate mortgages are always the way to go. Their reasoning is that variable-rate mortgages have historically beat out fixed rates, or that variable-rate mortgages have always worked out for them in the past.

Everybody’s situation can be a little different, so I’m not a big believer in ‘one size fits all’ mortgage advice. This is especially true with the fixed vs. variable debate. While it’s easy for some to suggest that everyone should always choose variable, this is not the best advice.

There are three major factors that need to be considered before determining which option is best for you:

  1. Risk tolerance
  2. Economic outlook
  3. The spread between fixed and variable

Let’s look at all three in detail, and then we’ll analyze the current situation so we can help you to decide on which option will be the best choice for you personally.

Risk Tolerance

Over the past 35+ years, people have come out ahead with a variable rate mortgage more than 80% of the time. Great odds, but it is not a definite winner every time. This is why the most important consideration is your tolerance for risk.

The more risk-averse borrowers will tend to gravitate towards fixed-rate mortgages. They like the comfort and peace of mind that comes with knowing that their rate and payment will be locked in for the entire term. It doesn’t matter what the predictions are, or how much lower variable-rate mortgages are at the time. They can’t handle any sort of risk or uncertainty, so they lock themselves into a fixed-rate mortgage. Nothing wrong with this at all.

For those who are okay with taking a chance, variable is often their first choice. They know that historically speaking, the odds are in their favour, so they are comfortable with the added risk.

The question you’ll want to ask yourself is this:

How would you feel if your rate and your payment were to increase by the end of this year?

And then again next year?

Just to be clear, the odds of this happening in this environment are essentially nil. The question is simply to determine your risk tolerance, not to make a prediction on where rates are heading. If you’re comfortable with an increasing rate and payment, then a variable rate mortgage would be a good choice (based on risk tolerance). However, not everyone has this same level of comfort. If the thought of an increasing rate and payment creates worry and anxiety for you, then a variable rate mortgage is likely not your best choice.

The best choice is not always the one that saves you the most amount of money. It’s the one that allows you to sleep soundly at night.

Economic Outlook

We are in unprecedented times right now. Our economy has taken one heck of a beating, and its future is uncertain. The government continues pumping money and stimulus into our economy, with no end in sight. The impact of the COVID-19 pandemic has certainly made its economic mark, forcing mortgage rates down to new historical lows. This applies to both fixed-rate mortgages, as well as the prime rate (which is what variable-rate mortgages and HELOCs are based on).

It’s a relatively safe prediction that mortgage rates will remain at record lows for years to come. Even with some fixed-rate mortgages now below 2%, there is still room for mortgage rates to drop further, which is likely.

 The Spread Between Fixed and Variable

In a regular market, I generally like to see variable rate options at least 0.50% lower than the fixed-rate alternatives for me to comfortably suggest them. However, this is anything but a regular market.

Given the current economic situation, the prime rate is not expected to change for at least two to three years. I would not be surprised if it kept the status quo for the next five, although that would be a pretty bold prediction. When it does start to increase, the Bank of Canada will be taking baby steps, and I would not expect to see more than one or two increases over the next five years, if at all.

For this reason, variable-rate mortgages can be great options, even with thinner spreads, but this is still something that you need to pay close attention to. The thinner the spread, the more risky variable-rate mortgages become.

Let’s now take a look at two real-world mortgage rate examples,

Example 1

The lowest variable rate for an insured mortgage is prime -0.70% (1.75%).

The lowest 5 year fixed for the same mortgage is 1.84%.

This represents a spread of only 0.09%.

Given that the spread here is minimal, it would be hard to justify choosing the variable rate option in this case. You still may come out ahead, but given the small difference in rate, I would suggest the fixed-rate option for most borrowers in this case.

Example 2

On purchases over $1 million, refinances, and mortgages with a 30-year amortization, the lowest variable rate mortgage is prime -0.50% (1.95%)

The lowest 5 year fixed for the same mortgage is 2.24%.

This represents a spread of 0.29%.

In this case, there is a much larger spread than the insured example above, which makes the variable rate option more attractive. 

For those comfortable with the risk associated with a floating rate, the variable option would be a great choice in this example. For those with a lower tolerance for risk, then it’s best that you stick with the fixed rate.