Fixed or variable: how to decide

This is the question almost everyone asks first, and it is usually asked in the wrong form. People want to know which one is cheaper. Nobody can tell you that, because the answer depends on what happens next, and anyone who claims otherwise is guessing with confidence.

What you can work out in advance is which one suits your situation, your tolerance for change, and your likelihood of needing to get out early. Those are answerable today.

What each one actually is

A fixed rate is locked for the whole term. Your rate does not move and your payment does not move. Whatever happens in the wider economy over those years is not your problem.

A variable rate is set relative to your lender’s prime rate. When prime moves, your rate moves with it. What happens to your payment depends on which kind of variable you have, and this is the part people miss.

• Adjustable payment. Your payment changes when the rate changes. Rates rise, you pay more each month, and the mortgage still finishes on schedule.
• Fixed payment variable. Your payment stays the same and the split between interest and principal shifts instead. Rates rise, more of each payment goes to interest and less to the balance.

That second kind feels safer and can be the more dangerous of the two. If rates climb far enough, your payment may stop covering the interest. Lenders call this the trigger rate. At that point they will require a higher payment, a lump sum, or a conversion. Ask which type you are being offered, because the two behave very differently under pressure.

Why the honest answer is not a prediction

The usual argument for variable is that it has historically cost less over time. That is a statement about the past, not a forecast, and someone who took a variable rate at the wrong moment has an entirely different story.

Here is the more useful framing. Choosing variable is accepting known uncertainty in exchange for flexibility. Choosing fixed is paying for certainty. Neither is clever and neither is naive. They are different products for different situations.

The part that usually decides it

For most people the deciding factor is not the rate at all. It is the penalty if you break the mortgage early, and the gap between the two is large.

Break a variable mortgage and the penalty is typically three months of interest. It is predictable and, in the scheme of a mortgage, usually modest.

Break a fixed mortgage and the penalty is typically the greater of three months of interest or the interest rate differential. The differential can be many times larger, and at a big bank it is calculated in a way that inflates it further. We wrote about that separately in what it costs to break your mortgage.

So the real question becomes: how likely are you to break this mortgage before the term ends? And people consistently underestimate that. Roughly speaking, a large share of mortgages do not run their full term, because life intervenes.

Questions that get you to an answer

Work through these honestly rather than optimistically.

• Could you absorb a higher payment? Not in theory. Look at the actual number if rates rose meaningfully and ask whether that month would be uncomfortable or genuinely difficult. If it is the second, take fixed.
• Will you still be in this home at the end of the term? A job that might relocate, a growing family, a relationship in transition, a business that might need capital. Any of those raise the chance of breaking early, which favours variable or a shorter fixed term.
• Does the uncertainty bother you? This is not a soft consideration. Someone who checks the rate announcement every six weeks and feels sick about it has chosen the wrong product, whatever the arithmetic says.
• How tight is your budget? If the mortgage payment is comfortable, you can absorb variation. If it is at the edge of affordable, certainty is worth paying for.
• Might you need to refinance? Pulling equity out midway through a fixed term means breaking it and paying the penalty. Variable makes that far cheaper.

Things worth knowing before you sign either one

You can usually convert a variable to a fixed. Most lenders allow it at any point without penalty. The catch is that you convert at whatever fixed rates are available then, not the ones you passed up at the start. It is a genuine safety valve, not a free option.

The term length is a separate decision. Fixed or variable is one choice. How many years is another, and it is often the more consequential one. A shorter term costs you less to exit and brings the next decision sooner. A longer one buys more certainty and locks you in harder.

The rate is not the whole product. Prepayment privileges, portability, whether it is a collateral charge, and how the penalty is calculated all vary far more between lenders than rates do. A slightly better rate on a mortgage you cannot leave without a punishing penalty is not actually a better deal. Our page on refinancing covers what that can cost.

Where we land

We do not have a house view, and we would be suspicious of a broker who did. What we do is show you the payment under both, show you what each would cost to exit in year two and year three, and then ask the questions above.

Most of the time, once someone sees the penalty difference alongside the payment difference, the answer becomes obvious to them without anyone needing to argue for it.

If you want that comparison run on your actual numbers, tell us the situation. We do not publish rate figures on this site, but we will set out in writing what is genuinely available for your file.