Fixed or variable mortgage: five questions before choosing

A choice that rests on your budget, not on a prediction

The question “fixed or variable?” often leads to forecasts: what will rates do, who will be right, which choice would have been preferable. The problem is that nobody can know in advance. Building a decision on a prediction is betting, and a mortgage is not a bet.

A more useful approach starts from what you do know: your budget, your plans, how you react to uncertainty. A fixed rate keeps the same rate throughout the term. A variable rate follows a reference rate that can change along the way; depending on the contract, it is the payment or the interest share that moves.

This article offers five questions to ask yourself before choosing. It contains no rates and no forecasts: rates change often, and institutions publish them themselves. Nor does it say which type to choose.

An authorised person, registered with the Autorité des marchés financiers (AMF), can then apply these questions to your file, and present products from several lenders. What follows is not personalised advice.

1. Could my budget bear an increase?

With a variable rate, the cost of borrowing can change during the term. Depending on the contract’s formula, the payment itself may rise, or it may stay the same while the share of the payment that repays principal shrinks. Either way, the effect is felt, either right away or at maturity.

The useful question is not “will rates go up?” but “what would I do if they did?”. Do the exercise with cautious assumptions: imagine a clearly higher payment and see what it would do to your monthly budget.

A few points to examine:

• your current margin between income and fixed expenses;
• your other commitments, such as a car loan or a credit card;
• the stability of your income, especially if you are self-employed or paid on commission;
• an emergency reserve available to cushion a shock.

If the mere idea of an increase makes you uncomfortable or would strain your budget, that is valuable information. It forbids you nothing, but it tells you how much predictability matters to you. Doing this stress test calmly is better than discovering your limit in the middle of a period of increases.

2. Do I need predictability?

A fixed rate gives a stable payment, from the start to the end of the term. That stability has a concrete value: it lets you plan, budget and sleep without following rate announcements. If a tight budget, a specific project or a transition period depends on that stability, it is an argument to weigh seriously.

Conversely, some people tolerate variations well. They have margin, flexible income or a horizon that lets them absorb a change. For them, predictability carries less weight, and variable may make sense.

To clarify your need:

• picture the next two or three years: a child, a job change, a renovation project;
• ask yourself whether a payment variation would cause you stress or real difficulty;
• note whether your income is stable or fluctuating;
• take into account what your partner thinks, if you borrow together.

There is no universal right answer. Predictability is not free, and variable is not necessarily risky for everyone. What matters is choosing knowing why, and being able to explain your reasoning out loud without mentioning any market forecast.

3. What happens if I want out of the contract?

Prepayment penalties are not calculated the same way for the two types of rate, and they vary from one lender to another. The difference is easy to ignore at signing, then very concrete when a move, a sale or a refinancing comes up mid-term.

As a general rule, the calculation method for a fixed rate can be more complex and, in some cases, more costly. That for a variable rate is often simpler. But “as a general rule” is not “always”: everything depends on the formula written in your contract.

Before signing, ask for:

• the exact penalty formula, word for word;
• a worked example, based on a fictional case, with the same assumptions for each product;
• the prepayment and extra-payment privileges;
• whether the loan can be transferred if you move;
• discharge or transfer fees.

Put these questions to each product compared, and ask for the answers in writing. A penalty that seems distant at signing becomes very real if your situation changes. It is better to know in advance what it represents.

4. Which term suits me?

The choice of rate type is not made alone: it comes with a term length. The term is the period during which your contract’s conditions are fixed. The amortization is the total time planned to repay the loan. The two are distinct and can be chosen separately.

A short term leaves flexibility, since you can review your conditions more often. On the other hand, you return to the market more often, with all that implies. A long term offers more stability, but makes a change of plan more costly if your situation evolves.

To guide your thinking:

• the timeline of your plans: do you expect to move, expand, sell?
• your professional and family horizon for the next few years;
• your comfort with renegotiating more often;
• the effect of the term on a possible penalty.

The timeline of your plans is a better guide than any forecast. If you think you will stay in your home for a long time, that does not dictate a particular term, but it sheds light on the trade-off between flexibility and stability. Ask the authorised person to show you the options side by side, using the same assumptions, so the comparison stays readable.

5. What does the contract say about conversion?

Some contracts allow switching from one rate type to the other mid-term, on specific conditions. This option can seem reassuring: it gives the impression that a poor decision can be corrected. It deserves a close reading, though, because conditions vary considerably.

A few things to look for:

• is conversion allowed, and how often or at what times?
• to which rate types and terms can you convert?
• is the rate offered at the time of conversion set by the lender according to its grid of the day?
• do fees or conditions apply?
• does conversion change the length of the term or the maturity date?

Conversion does not guarantee you a particular result: it gives you a possibility, on the conditions of the moment. Do not treat it as insurance against a poor choice, but as an element of flexibility to compare from one product to another.

Read the clause in full and ask for explanations of anything that remains unclear. If the ability to convert matters to you, insist on seeing it in writing before committing, and keep a copy of the contract.

A hypothetical scenario

Picture a couple, whom we will call Noémie and Étienne. They are about to buy a first property. One works for a fixed salary, the other on commission. They hesitate between a fixed and a variable rate, and each has read a contradictory article.

Rather than looking for who is right, they start with their budget. They work out what would remain if their payment rose noticeably, then note that commission income is irregular. They realise that predictability matters a great deal to them, at least for the first few years.

They then put the same questions to an authorised person: penalty formula for each product, a fictional worked example, conversion possibilities, prepayment privileges. They note the answers side by side, and discuss the length of the term in light of their plan to have a child.

This scenario is fictional and guarantees no outcome. It illustrates an approach: start from the budget, name your needs, compare complete conditions, then decide. In this example, the final decision is theirs. They did not try to predict the market, only to choose a contract they can live with.

Mistakes to avoid

A few mistakes come up often when choosing between fixed and variable. Knowing them lets you avoid them without special effort.

• Choosing based on a forecast about rates, which nobody can guarantee.
• Believing variable is always cheaper, or that fixed is always safer.
• Comparing only the advertised rate, without looking at the penalty, the privileges and conversion.
• Not testing your budget against a higher payment.
• Ignoring the term, which is just as important as the rate type.
• Forgetting that a plan to move or sell can make a penalty very concrete.
• Signing without asking for the exact penalty formula and a worked example.

None of these mistakes is serious on its own, but they add up. A conversation with an authorised person, registered with the AMF, helps spot them before signing.

A good way to avoid them is to write, before the meeting, three lines on your plans for the next five years and on what your budget can absorb. That small document makes the discussion much more concrete and keeps you from being guided only by how the product is presented.

Questions to ask before signing

Here is a list to bring to the meeting. Each answer should be given to you in writing, or appear in the offer you will receive.

• How is the penalty calculated for this product, and can you give me a fictional worked example?
• Under the contract’s formula, what changes if the reference rate moves: the payment or the interest share?
• What are the prepayment and extra-payment privileges?
• Can I convert mid-term, and on what conditions?
• Can the loan be transferred if I move?
• What fees are tied to setting up, transferring or discharging the loan?
• What happens at maturity if I do nothing?
• What is the difference between the term and the amortization in this contract?

Add a question about your own situation: what payment would be too high for me, and how would the product behave in that case?

An authorised person can answer these questions using each lender’s actual documents. If an answer is vague, ask for it in writing: clarity is part of the comparison.

How CompareTaux can help

CompareTaux is a referral service. It displays no rates, makes no automated decision and sells no product. You describe your situation in a short form, and your request is routed to an authorised person, registered with the AMF, who contacts you.

That person can obtain proposals from several lenders, present them side by side, and explain the differences between fixed and variable in light of your file. It is the person, not the website, who can give advice tailored to your situation.

You are under no obligation to follow through. If you want to check a person before speaking with them, the AMF register is public.

To dig deeper on your own, the FCAC, the Bank of Canada, CMHC and the AMF offer independent, free and up-to-date information. The Bank of Canada, for example, publishes its announcements and explanations: they describe an economic context, not an offer.

Frequently asked questions

Sources

• Financial Consumer Agency of Canada
• Bank of Canada
• Canada Mortgage and Housing Corporation (CMHC)
• Autorité des marchés financiers: public information