Since the Bank of Canada’s aggressive rate hikes in 2022, variable rate mortgages became as popular as flip flops in a snowstorm. Given that the prime rate had increased faster than anyone expected, the Bank of Canada included, very few could stomach the risk. Variable rate mortgages came with a significant rate premium, starting borrowers off at a disadvantage. The uncertainty was too much for most to handle driving the vast majority to fixed rates. 

But times are changing. 

Here’s what you need to know before making your final choice. 

 

Fixed vs. Variable Rate 

Deciding between a fixed or variable rate mortgage is a deeply personal choice—there’s no one-size-fits-all solution. As I emphasize in my book, Beat the Bank: How to Win the Mortgage Game in Canada, the right mortgage depends on your unique circumstances. What works for one person may not work for another.

Let’s break down the three key factors to consider when choosing a variable rate mortgage in 2025.  

 

1. Rate Spread

The difference between fixed and variable rates—known as the spread—is a critical factor. In a healthy market, variable rate mortgages are priced lower than the fixed rate options. But the past few years have been anything but a healthy market. Over the past couple of years especially, variable rates have been higher than fixed. To benefit from a variable rate, interest rates would need to drop quickly and enough to overcome the initial gap. The larger the initial gap, the further the rate will need to fall to win with a variable rate mortgage. 

While the spread has narrowed substantially compared to most of 2024, variable rates remain higher than fixed rates… for now. While variable rates were more than 1% higher than the fixed rate options at times in 2024, it has now been reduced to 0.15% to 0.25% in most situations. One more cut from the Bank of Canada and many variable rate mortgages will become lower once again. 

 

2. Market Outlook

Forecasts from Canada’s major banks provide insights into where rates might be headed:

  • CIBC: 1.00% in rate cuts by mid-2025, with stability afterward.
  • RBC: 1.25% in cuts by the end of Q3, no further changes for the year.
  • Scotiabank: A modest 0.25% cut by the end of Q1, with no additional reductions in 2025.
  • TD: 1.00% in cuts by year-end.
  • BMO: 0.75% in cuts by the end of Q3. No further reductions in 2025. 
  • National Bank: 1.00% in cuts by the end of Q3 with no further movement. 

Aside from Scotiabank, the big banks are predicting substantial rate cuts in 2025, suggesting variable rates would become more attractive as the year progresses.

That said, forecasts are educated guesses, and reality often differs. For example, in 2022, predictions of modest rate hikes were upended by unforeseen events like the Russia-Ukraine conflict, which significantly disrupted global supply chains and sent rates soaring. Anything can happen. 

 

3. Risk Tolerance

Your comfort with uncertainty is another vital consideration. Ask yourself the following questions:

  • How would you feel if rates didn’t drop as expected?
  • What if they didn’t drop at all?
  • What if they started to increase unexpectedly? 

 

If these scenarios make you uneasy, a fixed rate might be a better fit. While a variable rate mortgage has a good chance of putting you ahead, it’s far from a guarantee. If choosing a variable rate, you need to be comfortable with the risk. This is why I may suggest for one client to go with a fixed rate while suggesting a variable rate to the next person I speak with. Variable rate mortgages are not for everyone. As I often say, the best mortgage isn’t always the one that saves the most money—it’s the one that lets you sleep soundly at night.

For a more detailed outline on choosing a fixed or a variable rate, including two other important points of consideration, I suggest reading my blog: The Ultimate Guide To Choosing Fixed Vs. Variable 

 

Considering Fixed Rates

Even if the Bank of Canada lowers its rate, fixed mortgage rates are not expected to follow suit. The Bank of Canada rate and fixed rates do not move in tandem with one another. For instance, in the final quarter of 2024, the Bank of Canada cut its rate by 1.00%, yet fixed mortgage rates increased by around 0.30% during the same period. Now they’re rising again, thanks to strong employment numbers released out of both Canada and the US on January 10th. 

Historically, fixed rates and the Bank of Canada’s policy rate can move in opposite directions at times, which is what we’re seeing happening now. 

In 2022–2024, shorter-term fixed mortgages (e.g., 3-year terms) were highly popular as rates were expected to fall. Now in 2025, fixed rates have already dropped by roughly 2.00% from their peak in late 2023, but further decreases are likely to be minimal. For this reason, more are now starting to look towards variable or 5-year fixed products. 

 

My Final Thoughts 

With potential rate cuts of up to 1.25% by the end of the year, a variable rate mortgage could put you nicely ahead by the end of the term. But keep in mind that it’s all speculation. These are just forecasts which are always changing. We also must consider the unpredictability of incoming US president Donald Trump. One radical move could result in a change to the forecasts… which could be for better or for worse. Time will tell and anything can happen. 

Whether you lean toward a variable rate or opt for the stability of a fixed rate, the key is to make an informed decision that aligns with your unique situation. Everyone can be a bit different.