Canadian Mortgages: Fix or Float?
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The tantalizing prospect of rate relief from the Bank of Canada this summer underscores the dilemma many new and renewing mortgage holders are currently facing: lock in for several years or take a chance on lower rates by going variable. Given the wide chasm between fixed and variable rate mortgages, the choice can either lead to big savings or major headaches depending on where interest rates end up. We crunched the numbers on several options to provide some guidance. But word of warning, the estimates derive from two critical assumptions. First, the Bank of Canada does what we think it will do—that is, reduce policy rates gradually starting in June by 75 bps this year and another 125 bps before mid-2026. And second, the spread between policy rates and variable mortgage rates remains steady over time. Also note that results will differ if additional discounts are applied to the borrowing costs used in this exercise.
Based on current BMO ‘Special Limited-time Offer’ rates on uninsured closed mortgages—5.59% for five-year fixed, 5.65% for three-year fixed, and 6.95% for five-year variable—the three-year fixed rate option could save the most money over a five-year term, narrowly edging out the variable rate product. Assuming it is rolled into a variable rate loan after three years, the average rate over the entire five-year term would be 5.37%, a couple of basis points less than the average variable rate and 22 bps below the five-year fixed rate. The difference versus the five-year fixed rate option might not seem like much, but it could add up. A rough calculation (based on the national benchmark price of $718,400 in March and a 20% down payment) shows interest savings over five years of about $6,000 for the three-year rate option compared with the five-year fixed rate product.
The three-year fixed rate option opens the door for material savings compared with the five-year fixed rate loan, while still providing some peace of mind about rate uncertainty compared with the variable rate option. This assumes policy rates decline as expected. For example, if policy rates settle 50 bps higher than expected after three years, then the savings would be equalized across the three mortgage options.
Of course, every borrower’s needs are different, and some may have little choice but to lock in at the current lower five-year fixed rate if they can’t qualify under a higher rate option. Others may not have enough of a financial buffer to wager on an eventual decline in interest rates and could find themselves offside if rates end up higher than expected. If you’re still unsure, speak to a BMO mortgage representative for advice tailored to your financial needs.
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Sal Guatieri
Senior Economist
Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with two decades experience as a macro economist. With BMO Financial Group since 1994, his m…(..)
View Full Profile >The tantalizing prospect of rate relief from the Bank of Canada this summer underscores the dilemma many new and renewing mortgage holders are currently facing: lock in for several years or take a chance on lower rates by going variable. Given the wide chasm between fixed and variable rate mortgages, the choice can either lead to big savings or major headaches depending on where interest rates end up. We crunched the numbers on several options to provide some guidance. But word of warning, the estimates derive from two critical assumptions. First, the Bank of Canada does what we think it will do—that is, reduce policy rates gradually starting in June by 75 bps this year and another 125 bps before mid-2026. And second, the spread between policy rates and variable mortgage rates remains steady over time. Also note that results will differ if additional discounts are applied to the borrowing costs used in this exercise.
Based on current BMO ‘Special Limited-time Offer’ rates on uninsured closed mortgages—5.59% for five-year fixed, 5.65% for three-year fixed, and 6.95% for five-year variable—the three-year fixed rate option could save the most money over a five-year term, narrowly edging out the variable rate product. Assuming it is rolled into a variable rate loan after three years, the average rate over the entire five-year term would be 5.37%, a couple of basis points less than the average variable rate and 22 bps below the five-year fixed rate. The difference versus the five-year fixed rate option might not seem like much, but it could add up. A rough calculation (based on the national benchmark price of $718,400 in March and a 20% down payment) shows interest savings over five years of about $6,000 for the three-year rate option compared with the five-year fixed rate product.
The three-year fixed rate option opens the door for material savings compared with the five-year fixed rate loan, while still providing some peace of mind about rate uncertainty compared with the variable rate option. This assumes policy rates decline as expected. For example, if policy rates settle 50 bps higher than expected after three years, then the savings would be equalized across the three mortgage options.
Of course, every borrower’s needs are different, and some may have little choice but to lock in at the current lower five-year fixed rate if they can’t qualify under a higher rate option. Others may not have enough of a financial buffer to wager on an eventual decline in interest rates and could find themselves offside if rates end up higher than expected. If you’re still unsure, speak to a BMO mortgage representative for advice tailored to your financial needs.
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