Real Estate Talk: Fixed vs. variable rates - Westmount Magazine (2024)

The differences between a fixed and a variable mortgage rate explained

By Joseph Marovitch

March 10, 2022

I am often asked what is the difference between a fixed mortgage rate and a variable mortgage rate? Variable mortgage rates seem to be lower, therefore, why should I not take the variable instead?

A fixed mortgage rate is an interest rate that can be reserved by the buyer for up to three months before the purchase in a pre-approval. For example, if a potential buyer is pre-approved for a 5-year fixed-rate mortgage at 2.65% on January 1 and purchases a property on February 25 when the current rates have risen to 3.05%, the pre-approval guarantees the buyer the pre-approved rate of 2.65% for 5 years, even if the current rate continues to rise. The downside is that fixed mortgage rates are usually higher than variable, however, they are fixed and will not increase as rates rise.

The general rule is in good times with a thriving economy, interest rates rise, and a fixed mortgage is usually a better option.

A variable mortgage rate is usually a lower rate. Buyers like variable rates because, in the short term, the interest rate is lower. However, variable rates are flexible, meaning they rise and fall with rising and falling Bank of Canada rates. The rate a buyer may have presently is 2.50%, however, tomorrow it can be 2.80% or 3%. Rates can also fall, and so will the buyer’s interest rate, but more often, rates rise.

Currently, rates have been historically low for the past two years amid the pandemic. However, with restrictions lifted and inflation rising, rates are expected to increase. This situation would be a good reason to lock in a fixed lower rate now in preparation for expected rising interest rates.

Variable rates are also usually shorter term such as 1, 2, or 3 years. If a short-term mortgage loan is required due to circ*mstances such as a possible move or life change, a variable rate may be more appropriate. As well, situations such as wars, i.e. Russia/Ukraine, a possible 6th wave of COVID-19, or other natural or manmade disasters are also times when, with uncertain economies, a variable rate may be a better solution.

‘If a short-term mortgage loan is required due to circ*mstances such as a possible move or life change, a variable rate may be more appropriate.’

The general rule is in good times with a thriving economy, interest rates rise, and a fixed mortgage is usually a better option.

I have offered a general understanding of fixed and variable rates. There is much more to this topic. Should you have questions feel free to contact me. I can provide further information or refer you to experienced mortgage professionals.

Should you have questions or comments, please refer to the comments section at the bottom of the page. As well, to view past articles, click here.

Next article: Revisiting upcoming amendments to the real estate brokerage act which come into effect June 10, 2022 – double representation restrictions for brokers

State of the market

Across Canada from Calgary to Toronto, listings have increased in February, according to a recently published RBC report. However, this does not seem to be the case in Quebec, according to the Quebec Professional Association of Real Estate Brokers (QPREB).

One month of increased listings across Canada is not a trend yet, but it is a good indicator. According to the RBC report, increased listings may be the result of sellers wanting to sell before the expected increase in interest rates, which will likely cause less buyer competition and favour a buyer’s market. Another reason for more listings across Canada is the lifted COVID-19 restrictions and a re-emerging economy.

‘Montreal does appear to have increased listings according to Centris results, however, nowhere near the increase seen outside the province… Whatever the case, demand in Quebec is still high, and inventory is still low. The result is continued increasing prices.’

Montreal does appear to have increased listings according to Centris results, however, nowhere near the increase seen outside the province. This may be due to real estate concentrated in the city where available land is limited for new development. Whatever the case, demand in Quebec is still high, and inventory is still low. The result is continued increasing prices.
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Other articles by Joseph Marovitch