Fixed vs. Variable Mortgage Rates in 2025: Which One is Right for You?

Are you thinking of buying a home in Canada in 2025? If so, one of the biggest decisions you’ll need to make is whether you want to apply for a fixed-rate or a variable-rate mortgage. Essentially, with a fixed-rate mortgage, your payments will remain the same for the duration of your mortgage term, while with a variable-rate mortgage, the portion of your payments that goes towards interest vs the principal can fluctuate throughout the term. We’ll get into the details below to help you better understand the difference between fixed rates and variable rates and decide which one meets your needs. Of course, it’s important to keep in mind that the right type of mortgage for you will depend on your individual circumstances, needs and tolerance for risk. 

What is a Fixed Mortgage Rate? 

A fixed mortgage rate is just like it sounds - it stays fixed and does not change for the duration of your mortgage term (i.e. the length of time for which your mortgage contract is in effect). Fixed mortgage rates are closely tied to the bond market, as opposed to being directly affected by the Bank of Canada’s rate decisions. Thus, if bond rates rise, fixed mortgage rates are almost sure to do the same, and vice versa. However, once you have contracted a mortgage with a lender, a fixed mortgage rate will not change for the entirety of the mortgage term you choose, regardless of what happens in the bond market. That means that your mortgage payments will not change, affording you peace of mind. 

This stability comes with a price, however, as posted fixed mortgage rates tend to be higher than posted variable mortgage rates. To be able to guarantee your rate, your lender has to charge you a premium. That said, if you’re someone who has a low tolerance for risk and values stability, it could well be worth it to pay a little extra. Fixed-rate mortgages typically carry hefty penalties if you attempt to break them, although these vary from one lender to another. Typically, if you have a closed fixed-rate mortgage (see below for more on closed mortgages), if you choose to break it (or pay it off early) you’ll be liable to pay either the Interest Rate Difference (IRD) or three months’ interest, whichever is the greater amount. The IRD allows lenders to be compensated for the interest they lose when a mortgage is paid off early and can amount to tens of thousands of dollars.  Despite the lack of flexibility associated with fixed-rate mortgages, though, you may still want to opt for one for the sake of predictability, especially if you’re in a rising interest rate environment. 

Fixed-rate mortgage types

• Closed mortgage: The most popular type of mortgage, in a closed mortgage you have limited ability to pay your mortgage off early. If you attempt to make lump sum payments, you may be charged prepayment penalties. 

• Open mortgage: This type of mortgage allows you to repay your mortgage ahead of time if you are able to, with no prepayment penalty. That said, this flexibility means that open mortgage rates tend to be noticeably higher than closed mortgage rates. 

Fixed mortgage rates: Pros and cons

Pros:

• Interest rate and mortgage payments remain unchanged throughout your mortgage term.

• Due to the fixed nature of your payments, you’ll be able to budget more precisely and have peace of mind.

Cons:

• Interest rates on fixed-rate mortgages are often higher than those on variable-rate mortgages.

• Penalties for breaking your mortgage are typically higher than for variable-rate mortgages.

• If interest rates fall during your mortgage term, you will still have to pay your contract rate, as you’re locked into it.

What is a Variable Mortgage Rate? 

In a variable-rate mortgage, you typically set your mortgage payments for your term (see “Variable-rate mortgage types” below for more details), but the variable rate itself can fluctuate during the term. Should interest rates rise, more of your mortgage payments go towards paying off interest rather than paying off the principal. This is because your variable mortgage rate is directly linked to your lender’s prime rate (the rate lenders use to determine the interest rates they advertise for their products). Your lender’s prime rate, in turn, is directly tied to the Bank of Canada’s rate decisions. Because a variable mortgage rate is not set for the duration of your term, if the Bank of Canada announces that its policy rate is going to increase, your lender will increase its prime rate, and, therefore, your variable mortgage rate, by the same amount. E.g. if the Bank of Canada increases its policy rate by +0.25%, your lender will increase its prime rate and your variable mortgage rate by +0.25%. Conversely, if the Bank of Canada reduces its policy rate, your lender’s prime rate and your variable mortgage rate will fall by the same amount, allowing you to take advantage of falling interest rates. 

In general, when inflation is high, the Bank of Canada will raise the policy rate to help the economy cool by making it more expensive to borrow money. When inflation is low, the Bank of Canada will cut the prime rate to make borrowing cheaper and stimulate the economy. Because variable mortgage rates are not predictable, they tend to be cheaper than fixed mortgage rates. Moreover, should interest rates start rising and you decide you want to convert your variable-rate mortgage to a fixed-rate one (or break it entirely), you’ll typically just be charged an amount equivalent to three months’ interest. Lastly, it’s been shown that, historically, over 90% of Canadians who maintained a variable mortgage rate throughout their mortgage term have paid less in interest than those who stuck to a fixed rate. While variable-rate mortgages inherently carry a degree of risk, if you find yourself in a falling interest rate environment and have an appetite for risk, they may be the right choice for you. 

Variable-rate mortgage types

Like fixed-rate mortgages, variable-rate mortgages also come in both open and closed options, with the same meaning. However, the following mortgage types are specific to variable-rate mortgages only:

• Fixed-payment variable-rate mortgages: These are by far the most common type of variable-rate mortgages. The size of your payment typically doesn’t change when interest rates rise or fall; rather, the portion that goes towards paying off the principal vs. the interest on the loan changes. However, in the event that interest rates rise so high that your mortgage payment no longer covers the interest on your mortgage loan, you hit what’s known as your “trigger point”. In this instance, your lender may increase your mortgage payments to ensure that you’re able to pay off your mortgage by the end of your amortization period (the total length of your mortgage loan). 

• Variable-payment variable-rate mortgages: In this less common type of variable-rate mortgage, your actual monthly payment itself fluctuates along with interest rates, making it a particularly risky choice (since your monthly payments are not predictable and subject to change). 

Variable mortgage rates: Pros and cons

Pros:

• Interest rates on variable-rate mortgages tend to be lower than those for fixed-rate mortgages.

• If interest rates drop during your mortgage term, you’ll be able to take advantage of the lower rate.

• Variable-rate mortgages are more flexible than fixed-rate mortgages and can potentially be converted into a fixed-rate mortgage. Breaking a variable-rate mortgage is also usually cheaper than breaking a fixed-rate mortgage.

Cons:

• You will be exposed to interest rate fluctuations, and more of your mortgage payments will go to paying off the interest than the principal if your mortgage interest rate rises during your term.

• Paying more towards interest can make it longer to pay off your mortgage.

• It will be harder for you to budget, since it’s not possible to predict interest rate fluctuations with certainty; this makes it a poor choice for risk-averse borrowers.

Is It Better to Get a Fixed or Variable-Rate Mortgage in 2025? 

After an extended period of rising rates that lasted from June 2022 to June 2024, the Bank of Canada began lowering interest rates in response to falling inflation rates as well as information from various economic reports from Canada and abroad. Since then, the Bank of Canada has lowered its policy rate at each rate announcement, taking it from 5.00% in June 2024 to 2.75%, where it sits today. Given the current uncertain economic climate, it’s difficult to say whether or not the Bank will continue to cut the policy rate, or whether it will simply hold it steady. 

As mentioned above, the Bank typically lowers the policy rate when inflation is low and it wants to encourage borrowing, and raises it when inflation is high and it wants to discourage borrowing. With the Canadian economy currently relatively weak and potentially heading towards recession, it is very unlikely that the Bank will raise the policy rate any time soon, meaning that variable mortgage rates will also not rise and may very well fall (should the Bank implement another policy rate cut). These conditions have seen variable-rate mortgages experience a surge in popularity in 2025. 

However, as always, it’s important to keep in mind the pros and cons of each type of mortgage. So, for example, just because variable rates are low right now doesn’t mean that there won’t be inflation in a year or two that could require the Bank of Canada to once again raise the policy rate, driving your variable mortgage rate up as well. You need to consider your own appetite for risk as well as your ability to handle an increase (or several) in your mortgage payments in the event of a policy rate hike. If you find that you just want peace of mind and predictability, a fixed-rate mortgage might make more sense for you. In rapidly shifting economic conditions such as we are experiencing today, many risk-averse mortgage-holders opt for a short-term fixed-rate mortgage (i.e. one that is less than 5 years in length, with 3 years being the most popular option) to ride the period out before committing to a longer mortgage.

"Choosing between a fixed and variable mortgage rate depends very much on your personal circumstances and your appetite for risk," says Jesse Abrams, co-founder and CEO of Toronto-based mortgage brokerage Homewise. "If predictability and the peace of mind knowing that your mortgage payment will remain constant are important to you, then a fixed rate provides that kind of stability. However, if you're comfortable with possible fluctuations and are willing to take on some risk in exchange for potentially lower interest costs, a variable rate could be advantageous. Especially in 2025, with interest rates expected to continue falling, a variable rate could present an opportunity for savings. At the end of the day, the best choice depends on your financial goals, comfort with risk and outlook on future interest rate trends." 

The Bottom Line

The type of mortgage you choose is highly dependent not only on current market conditions, but also on your own individual needs, preferences and circumstances. There is no single right answer as to what the best type of mortgage is. Instead, consider how important things like predictability and peace of mind are to you, and how comfortable you are with the possibility of your mortgage payment fluctuating during your term - if you want predictability, fixed may be the way to go; if you’re comfortable with fluctuations (in exchange for saving on interest in the long term) variable could be a better option. If you’re still unsure of what the right type of mortgage to suit your needs might be, you should think about speaking with a mortgage broker. A mortgage broker has access to products from multiple lenders in various shapes and sizes and can give you personalized advice at no cost to you.