Whether you’re applying for a new mortgage or are up for renewal on an existing home loan, you have a lot of decisions to make. And perhaps one of the more important ones is whether you should go for a fixed-rate or variable-rate mortgage.
Ultimately, the decision you make comes down to which option is more affordable for you and which one will save you more money. So, when it comes to a fixed versus variable rate for 2025, which one should you choose?
Key Points
- The choice between fixed versus variable rates on mortgages will depend on several factors, including your risk tolerance and mortgage trends.
- Both fixed and variable mortgage rates are expected to decline over the next few months and years, though will likely not reach the low point we saw back in 2021.
- Current mortgage holders could potentially see spikes in mortgage payments in the near future, particularly those who took out mortgages in 2021 when rates were near historic lows.
Mortgage Interest Trends For 2025
Mortgage interest rates have certainly taken off over the past couple of years and are a far cry from the low 3.0% range that we saw back in 2021. Right now, mortgage interest rates for 5-year fixed-rate mortgages are just under the 7.0% mark. They’re even higher for shorter-term mortgages.
Thankfully, rates seem to have plateaued recently and may even be on their way down. Industry experts believe that mortgage interest rates will dip slightly in 2025.
Some lenders have even begun offering rates under 5% for 5-year fixed-rate mortgages, depending on borrowers’ creditworthiness. This dip followed a decline in 5-year bond yields, which influences how fixed-rate mortgages behave.
What Will Rates Look Like In The Next Few Years?
After a couple of years of soaring mortgage rates, what will rates do in 2025 and beyond?
Experts anticipate interest rate cuts over the next few years. This is good news for both homebuyers and homeowners looking to renew their mortgages shortly.
Inflation has finally settled down somewhat, and the Bank of Canada has slashed its policy rate to 3.25% again as of its latest report in December 2024. The central bank has also suggested that there won’t be any more rate increases anytime soon, and has in fact hinted at potentially more rate cuts. In the meantime, bank prime rates have dipped to 5.95%.
While the Bank of Canada doesn’t set mortgage interest rates, it has some influence on them. Meanwhile, variable-rate mortgages are directly tied to overnight bank rates. If these rates decrease, so will variable rates.
Industry experts expect variable rates to be lower than fixed rates over the next couple of years. If that happens, borrowers may realize greater savings by opting for variable-rate mortgages.
Should You Get A Fixed Or Variable Rate Mortgage In 2025?
The choice between a fixed or variable rate mortgage for 2025 will ultimately depend on your specific situation, appetite for risk, and the market. To help you decide which route to take, consider the following.
When To Choose A Fixed-Rate Mortgage
A fixed-rate mortgage may be best if you plan to stay put in your home over the foreseeable future with no plans to sell or break your mortgage early.
These mortgages may also be best if you expect rates to potentially increase over the next few months. By locking in at a lower rate today, you can protect yourself against rising rates in the near future.
Fixed-rate mortgages are also ideal for homeowners who prefer the predictability that comes with these types of mortgages. While the rate may be slightly higher than a variable-rate mortgage, the stability and consistency of fixed-rate mortgage payments are easier to budget for.
3-Year Fixed Rate Vs 5-Year Fixed Rate Benefits
If you opt for a fixed-rate mortgage, you have even more choices to make as far as term length goes. Fixed-rate terms range from as little as 6 months to up to 10 years. That said, the more common term lengths are 3 and 5 years.
3-Year Fixed Rate Benefits
- Lower rates. Shorter-term mortgages have historically come with slightly lower interest rates compared to longer-term home loans. That means you could potentially save some money by going with a 3-year term versus a 5-year term, depending on the current and future market.
- More flexibility. A 3-year term means a shorter commitment on your mortgage. This allows you to make changes to your mortgage terms more frequently.
- Lower early repayment penalty fees. If you choose to break your mortgage early, the penalties on a 3-year fixed mortgage term are usually lower compared to a 5-year term.
5-Year Fixed Rate Benefits
- Consistency. A 5-year term means your rate and mortgage payments will stay the same until it’s time for renewal. More predictable payments will make budgeting much simpler.
- Security against changing rates. Even if mortgage rates fluctuate throughout the term of your mortgage, your mortgage payments won’t be affected as long as you’re locked in.
- Infrequent renewals. When you lock in a loan term for 5 years, you won’t have to renew your mortgage as often as you would with a 3-year term. This can save you time, hassle, and even money depending on the market at the time of renewal.
When To Choose A Variable Mortgage
A variable-rate mortgage may be better suited for you if you intend to sell your home or refinance over the next couple of years. With a variable-rate mortgage, you won’t be stuck with the sky-high penalty that typically comes with breaking a fixed-rate mortgage early. Instead, you’ll only pay a smaller interest-based penalty, no matter when you choose to break your mortgage to sell or refinance.
Variable-rate mortgages may also be ideal if you expect rates to stay low or decrease over the near future. That way, you’re not locked in at a rate that may eventually be higher than the going rate. And if you choose to, you can lock the variable rate into a fixed rate whenever you want, without having to break the mortgage.
How Can You Find A Good Fixed Or Variable-Rate Mortgage?
No matter what type of mortgage you opt for, your ultimate goal is to secure the most affordable mortgage possible. And that typically means locking in the lowest rate that you can qualify for.
Perhaps the most effective and efficient way to find a good fixed or variable mortgage rate is to use the services of a mortgage broker, like Mortgage Maestro. These professionals network with dozens of top lenders in Canada and can pinpoint exactly who can provide you with the lowest rate based on your financial and credit profile.
Once you’ve narrowed down your options, your mortgage broker will negotiate with the lender to finalize a deal that works with your budget.
Not only can mortgage brokers get you the lowest rate, but their services come with a slew of other perks:
- Apply online and get a free no-obligation quote
- Compare multiple offers to find the best one
- Customized mortgage solutions based on your situation
- Personalized guidance throughout the mortgage application and approval process
Will Your Mortgage Payments Increase?
An increase in mortgage interest rates can certainly cause your mortgage payments to go up. As mentioned, rates are much higher today than they were a few years ago. If your mortgage term is up for renewal sometime soon, the rate you’re offered will likely be higher than the original rate you locked in at.
As of late 2023, roughly 45% of the mortgages that closed before the Bank of Canada began hiking its policy interest rate in early 2022 have seen increased payments. By the end of 2026, the remainder of homeowners who took out mortgages during that time frame will need to renew. Depending on how interest rates behave, these mortgage holders could be stuck with much higher mortgage payments.
Those who took out their mortgages in 2021 when rates were hovering near historical lows will likely see the highest mortgage payment increases by the time they renew.
Moreover, the type of mortgage (fixed or variable-rate) you have will also impact how much your mortgage payment increases. For instance, those who took out variable-rate mortgages back in 2021 could be faced with the highest mortgage payment increases by the end of 2026. Those with variable payments have already seen median payments spike by 70% from February 2022 to November 2023.
At the end of the day, the type of mortgage you took out, when it’s due for renewal, and the rate you initially locked in at will all play a role in how your mortgage payments will be affected in the near future.
Final Thoughts
Choosing between a fixed-rate or variable-rate mortgage requires thoughtful consideration. If you’re worried about potential fluctuations in rates and prefer some stability, then perhaps a fixed-rate mortgage may work best. On the other hand, if you have a higher risk tolerance and expect rates to dip shortly, then a variable-rate mortgage is worth considering.
Always consult with a mortgage specialist to help you make this crucial decision and ensure you choose a product that will save you the most money in the long run.
