Comparing Fixed vs. Variable Rates

Craig Sebastiano
by Craig Sebastiano May 14, 2018 / No Comments

Homebuyers have been asking themselves for years whether or not they should go with a fixed- or a variable-rate mortgage. If history is any guide, the answer is clear: variable-rate mortgages have been cheaper.

A 2001 study found that choosing a variable-rate mortgage over a fixed rate was the better option nearly 90% of the time between 1950 and 2000. But what about recently?

Using Ratehub.ca’s mortgage payment calculator, we’ll take a look at the difference in payments over various five-year periods for homebuyers had they selected fixed or variable rates.

First, we’ll travel back in time to 2006. Stephen Harper defeated Paul Martin in the federal election, the U.S. housing market was booming, Justin Timberlake was “bringin’ sexy back,” and Toronto sports fans were annoyed that both the Maple Leafs and the Raptors didn’t make it to the playoffs.

In May 2006, mortgage rates were much higher than they are today. The rate on a five-year fixed mortgage was 5.25% while it was 5.1% on a variable-rate mortgage.

Let’s assume you used a mortgage affordability calculator and found out you could buy a $500,000 property if you put 20% down. On a $400,000 fixed-rate mortgage with a 25-year amortization, your monthly payment would have been $2,384. Over five years, that adds up to $143,020. (Note that some numbers may not add up exactly due to rounding by the mortgage calculator.)

If you chose a variable-rate mortgage, your monthly payment would have been $2,349 or a total of $140,955 over five years. That’s a difference of just $2,065.

Mortgage type Mortgage rate Monthly payment Total payments over five years
Fixed 5.25% $2,384 $143,020
Variable 5.1% $2,349 $140,955


However, it should be noted that interest rates fell over those five years and if you had a variable-rate mortgage, a larger portion of the payment would have gone towards paying down principal than interest.

If we fast forward to May 2009, the U.S. housing market was still suffering after the global financial crisis, Canada’s housing market was bouncing back, the stock market was on the road to recovery, and both the Leafs and the Raptors didn’t make it to the playoffs—again. Interest rates fell, but the gap between fixed and variable rates widened.

If you chose a fixed rate of 3.59% then, your monthly payment on a $400,000 mortgage would have been $2,016 for a total of $120,968 over five years. With a variable rate of 2.75%, your monthly payment would drop to $1,842 and you would have paid $110,523 over a five-year period. That’s a difference of $10,445 by choosing the variable-rate mortgage.

Mortgage type Mortgage rate Monthly payment Total payment over five years
Fixed 3.59% $2,016 $120,968
Variable 2.75% $1,842 $110,523


A little less than a year later, there was an even larger gap between variable and fixed rates. In April 2010, the five-year fixed rate was 4.24% while the five-year variable rate was 1.7%.

On that same $400,000 mortgage with a fixed rate, your monthly payment would have been $2,156 and the payment over five years would have totaled $129,387. With the variable rate, you would have paid $1,636 a month or $98,188 over five years. The difference in the total payment would have been a whopping $31,199.

Mortgage type Mortgage rate Monthly payment Total payment over five years
Fixed 4.24% $2,156 $129,387
Variable 1.7% $1,636 $98,188

If we look at May 2012, the gap between fixed and variable rates narrowed significantly. (In case you’re wondering, both the Leafs and the Raptors didn’t make it to the post-season yet again.)

Fixed rates were 3.08% and your monthly payment would have been $1,909. Over five years, you would have made payments of $114,566. Variable rates were back to where they were three years earlier (2.75%). Your monthly payment would have been $1,842 and you would have paid $110,523 over a five-year period. The difference in the total payment was just $4,043.

Mortgage type Mortgage rate Monthly payment Total payment over five years
Fixed 3.08% $1,909 $114,566
Variable 2.75% $1,842 $110,523

In May 2015, the Conservatives were leading the Liberals and the New Democrats in most polls, and the Leafs didn’t make the playoffs. The Raptors, however, advanced to the playoffs, but the team was eliminated in the first round. Also, the gap between fixed and variable rates widened slightly.

On a $400,000 mortgage with a fixed rate of 2.44%, you would have made monthly payments of $1,780 and a total payment of $106,796 over five years. With a variable rate of 1.95%, you would have paid $1,684 a month and your total payment would be $101,050. The difference in the total payment would be $5,746.

Mortgage type Mortgage rate Monthly payment Total payment over five years
Fixed 2.44% $1,780 $106,796
Variable 1.95% $1,684 $101,050

If you look at current mortgage rates in Canada (as of April 30, 2018), the gap between fixed and variable rates has widened yet again. On that $400,000 mortgage with a fixed rate of 3.09%, you’ll pay $1,912 a month and make a total payment of $114,690 over the next five years. If your variable rate is 2.2%, your monthly payment will be $1,733 and the total payment will be $103,959. That’s a difference of $10,731.

Mortgage type Mortgage rate Monthly payment Total payment over five years
Fixed 3.09% $1,912 $114,690
Variable 2.2% $1,733 $103,959


While variable-rate mortgages have proven to be the cheaper option most of the time, fixed-rate mortgages are often better in a rising rate environment. Most economists predict the Bank of Canada will continue to raise interest rates. BMO Capital Markets, for example, expects the overnight rate to reach 2.5% late next year. It’s currently at 1.25%.

However, many economists were forecasting rates to rise or remain unchanged in 2015, yet the Bank of Canada cut rates twice that year so the experts could be wrong again.

The bottom line

Choosing between a variable or fixed rate depends on your level of comfort. If you have a variable-mortgage and interest rates rise, more of your payment will go towards interest. The opposite is true if rates fall. If you have a fixed-rate mortgage, more of your payment will go towards the principal over time no matter what direction interest rates go.

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Photo by Chris Liverani on Unsplash