Deciding between a fixed- or variable-rate mortgage has always been a challenging choice for borrowers looking to buy a home or renew a loan, but with interest rates sitting at levels not seen in decades, the stakes are especially high.

Variable-rate mortgages fell out of favour as Bank of Canada interest rate hikes sent the cost of loans linked to the big banks' prime rates soaring, but the cost of fixed-rate mortgages have also climbed from their pandemic lows.

Frank Napolitano, co-founder and mortgage agent at Mortgage Brokers Ottawa, said he's still seeing some borrowers opt for a variable rate, even noting that a recent client who was struggling with a variable-rate mortgage chose to stick with it after consolidating some other debt and extending the amortization period.

"He's decided he's going to go variable only because he believes that the rates are now probably at the peak and the payment that's been set up for him at 25 years is something that he's very comfortable with," Napolitano said.

"He's hoping that with so many people struggling that the interest rates are going to come down and then he will consider locking it in, but he wants rates to come down a little bit before (then)."

Napolitano adds that variable rate mortgages generally have less onerous penalties than fixed-rate options if you have to get out of your loan early 

Until recently, the cost of new variable-rate mortgages was typically a little bit lower than fixed offerings. 

Now, many of the rates offered for five-year variable-rate mortgages posted on rate-comparison website are higher than the five-year fixed-rate options. That means, banks will have to cut their prime rates for a variable-rate borrower to save money over a five-year term. 

This makes future interest rate changes by Canada's central bank a key focal point for those deciding between a variable- or fixed-rate mortgage.

In its latest interest rate announcement, the Bank of Canada kept its key rate steady at five per cent — but the central bank made it clear it is prepared to raise rates again to bring inflation down to its two per cent target.

For variable-rate borrowers, that means they need to prepare for the possibility that rates could rise before they move lower. Depending on the terms of the loan, that may mean higher monthly payments or extending the amortization period of the loan if rates go up.

Variable-rate mortgages can be converted to a fixed-rate loan without penalty, but you are typically locked in at the lender's posted rate. If you want to negotiate the fixed rate with your lender or move to a different lender, there will be a penalty. 

A fixed-rate option offers stability with monthly payments, but rates today are sitting at their highest level in recent memory. 

As interest rates rose over the last 18 months, fixed-rate borrowers benefited from being locked in. But if they lock in again now, at a higher rate that later falls, those borrowers would be stuck with the current rate for the term of their loan unless they choose the pay the penalty to break their mortgage. 

Allison Van Rooijen, vice-president, consumer credit, at Meridian Credit Union, recommends potential buyers and borrowers coming up for renewal start by looking at their budget.

"My best advice is to start by just jotting down your real life expenses ... everything you actually spend in a month and then use an online calculator and figure out what type of mortgage payment you could be facing," she said. 

"And do that well in advance of your renewal so that when you do talk to your financial services professional, you're going in eyes open."

Van Rooijen said it is a very different rate environment now than a couple of years ago.

"We have seen a real shift back to fixed-rate mortgages as Canadians are looking for monthly stability and some peace of mind," she said.

But she adds that many clients are opting to lock in a rate for terms shorter than the traditional five-year option, as they take a wait-and-see approach to where interest rates are headed in hopes rates might come down in the next few years.

Whatever a borrower decides, Van Rooijen said it is important to have the right loan for the situation.

"Every borrower has a different scenario based on where they are in their life, their home and their goals," Van Rooijen said.

"And so if you work with a financial professional, whether it's a credit union, a bank, a mortgage broker, seek out personalized advice because every situation is so different."

This report by The Canadian Press was first published Oct. 9, 2023.