Fixed or variable mortgage rate: Which should you choose in 2024?

It’s been a tough time for home owners (and first-time home buyers), but the Bank of Canada (BoC) has held interest rates steady since July 2023, and the latest economic data is leading experts to suggest that interest rate cuts may be on the horizon. So, what can Canadians expect from interest rates in the months and years ahead, and what does that mean for fixed mortgage rates and variable mortgage rates? We spoke to an economist and a mortgage broker to get a better sense of what’s ahead, and whether a fixed or variable rate is your best option in 2024.

What happened with interest rates in 2022 and 2023?

Rates went up significantly over the past two years, and a lot of it had to do with post-pandemic inflation.

“Central banks had to react very aggressively to the spike in inflation, and they jacked up interest rates significantly—475 basis points since March 2022,” says Robert Hogue, assistant chief economist at RBC Economics. (One basis point is equal to one hundredth of a percentage point. And 475 BPS means 4.75%.) “This is easily the most aggressive monetary policy we’ve seen in at least a generation.”

John-Andrew Newman, a mortgage broker in Oakville, Ont., notes that this aggression was essentially a side-effect of the economic impacts of the COVID-19 pandemic. “The COVID environment brought all rates down because the government influenced the interest rate marketplace in a way that was intended to help Canadians manage the effects of various lockdowns,” Newman explains. “They went extreme in one way, which led to inflationary factors peaking after [COVID], and then interest rates started to go up.” 

Rates climbed quickly to help tame decades-high inflation. “There was almost a whiplash effect [after COVID] as rates went up to the other extreme—and that’s where we are today,” Newman says.

Many mortgage holders with fixed-rate mortgages secured before the pandemic now face steep payment increases at renewal. Canadian mortgage holders with variable rates are also dealing with higher costs, though the impact has not been the same for everyone—some have seen their payments increase with every hike in the prime rate, while others haven’t. 

With a variable mortgage with adjustable payments (sometimes referred to as an adjustable-rate mortgage), the mortgage payments fluctuate in response to changes in the lender’s prime rate. Borrowers with this type of mortgage watched their payments increase as interest rates began to rise. 

However, many variable-rate holders have a mortgage with fixed payments. As interest rates rose, their mortgage payment stayed the same, but the amount of principal paid each month decreased as the amount of interest paid went up. Some of these borrowers have seen their amortizations stretched to point that their payments are almost interest only, Newman says. Some have reached their trigger rate—the point at which the mortgage payment no longer covers the mortgage interest costs.

This is one of the reasons it’s important to know what type of variable mortgage you have—the former can have a far bigger impact on your budget and cash flow in the short term, and the latter can result in a sudden spike when renewing your mortgage. That increase may be challenging for many mortgage holders to navigate, particularly if they’ve gone into negative amortization (when the monthly mortgage payments aren’t high enough to cover the interest owed on the loan). 

Interest rate prediction for Canada in 2024

Generally speaking, economists are predicting a slow but steady decrease in interest rates beginning early this year. While the BoC does not determine mortgage interest rates, there is a connection between the benchmark rate and what you’re paying for your mortgage—though, this isn’t always clear in real time.

“The policy rate for the Bank of Canada has a direct relationship with variable interest rates and an indirect impact on fixed rates through the bond market reaction,” Hogue explains. “Fixed rates are linked to bond markets and bond yields—it’s not direct, but the relationship is there.”

Essentially, as the BoC’s benchmark interest rate is gradually lowered, there will be a ripple effect on all mortgage rates—but not all at once. Hogue says we should see a drop in fixed mortgage rates before we see a decrease in variable mortgage rates—in fact, fixed rates have already started to fall. “Bond yields will [continue to] drift lower before rates are cut, likely well before mid-2024.”

So, when will the BoC begin cutting the benchmark rate? Hogue predicts it will start in mid-2024, and then proceed to lower it cautiously throughout the remainder of the year.

“In terms of policy rate, we think the Bank of Canada, and the Federal Reserve in the U.S., have done enough to get inflation back to its 2% target,” Hogue says. There can be very long lags, he notes, and inflation is not currently at its target—it rose to 3.4% in December 2023—and these factors will continue to have a restraining effect on the economy for six months or so. After that, steady decreases can reasonably be expected.

“We expect 100 basis point cuts in Canada in the second half of the year, which would take us to 4% at the end of [2024],” Hogue says. He notes that a 4% benchmark rate is still “fairly high and restrictive” for Canadians. “We do expect a cycle of rate cuts will continue into 2025, where we can expect another 100 basis point cuts.”

Hogue concludes that while the pivot point for rates will be in mid-2024, the BoC’s policy reversal will become more obvious in the year and a half that follows. 

Are variable rates becoming the better option again? 

When mortgage rates were at historic lows, many Canadians chose a variable mortgage instead of a fixed-rate one. This was because variable rates are typically, though not always, lower than fixed rates. If you were comfortable with a bit of risk (and a potential rise in mortgage payments), a variable rate has historically been a wise option.

As rates shot up over the past two years, many mortgage holders turned to the predictability of fixed rate mortgages. However, with interest rates expected to decrease, many Canadian home owners are considering variable-rate mortgages again.

Is that wise?

The short answer is “maybe,” according to Newman. He points to two major considerations at play: One is understanding where interest rates might be headed in Canada, and the second is knowing your capacity to manage risk when the future is uncertain. 

“Whether someone should take on the risk of a variable mortgage rate versus a long-term fixed rate has a lot to do with the individual borrower,” Newman says. “If someone has the tolerance to take on a riskier mortgage or maybe a short [mortgage] term, and they can withstand potential rate increases, that is part of the conversation.” 

Variable mortgages are starting to make sense again for some—but not all—clients who want to capture potential future rate drops, he says. Home owners and first-time home buyers should manage their expectations in terms of when rates will come down (and by how much). 

Newman expects the BoC to hold interest rates steady for some time before beginning to drop them—maybe in the spring or later in the fall. And he predicts that rates will drop by half a percentage point to a full percentage point. “I don’t see rates changing as fast as they did during COVID,” he says. “It will likely be much slower and much more controlled.”

Should you go with a fixed or variable rate in 2024?

The big question for many current and prospective home owners is which way to turn when signing their next mortgage contract: Fixed or variable?

Again, this depends on the individual or family and their risk tolerance. If you cannot withstand a potential jump, Newman says a fixed rate is likely the smarter choice. He notes that a mortgage should be chosen as part of your financial plan. And you should consider a number of personal factors, such as how long you plan to own the home.

“If you take a long-term fixed rate and end up breaking the mortgage, the penalties could be quite high,” Newman says, adding that clients should map out a few different scenarios and outcomes, then use that information to help make an informed decision.

For example, “If your time horizon involves a potential move in the next few years or your job may be changing, maybe you don’t want a five-year fixed,” he says. “There are [other] factors to analyze—not just the rate.”

From a financial planning perspective, you should weigh the possibility of immediate interest savings—for example, getting a lower fixed rate now versus a higher variable rate that may come down in the future. You should think about your interest-rate risk tolerance—meaning, your comfort with not being able to predict with certainty where rates will be in one, two or five years. And you should consider the length of your mortgage contract, as the penalty for breaking your mortgage could end up being thousands of dollars. (You can do the math using a mortgage penalty calculator.) 

Variable rate vs. fixed rate mortgage

Although each situation is unique, we asked Newman to recommend a type of mortgage based on hypothetical profiles of borrowers at various life stages and in different financial situations. What follows is a summary of his recommendations: 

What to do before getting a mortgage or renewing in 2024

Getting a mortgage is as personal as creating a budget, setting up your legal will and power of attorney documents or developing an estate plan—it’s never a one-size-fits-all solution. It often helps to speak to an expert who will walk you through various factors and explain the risks and benefits of each option in detail. A mortgage broker is one great option, but at minimum, you should thoroughly compare mortgage rates and term lengths in order to make an informed decision.

As Newman says, finding the “right” mortgage isn’t just about getting the lowest interest rate—it’s about choosing the mortgage and timeline that best reflects your needs, goals and financial situation. This advice applies to both first-time home buyers and those higher on the real estate ladder, and could result in an expert recommending a fixed or variable rate mortgage depending on your unique profile.

Rates are expected to go down—and things are looking up

After the financial impact of a pandemic, the ongoing effects of inflation and a stressful year or two for mortgage holders, Canadians have reason to feel more optimistic. 

“There is a more promising sense going forward,” says Newman. 

Home owners may be able to breathe a little easier, prospective home buyers may be able to make that jump into the market, and life could get just a little more affordable for Canadians. It won’t happen overnight or relieve all our financial burdens, but we’re headed in the right direction—and that’s good news for everyone.

Read more about mortgages:

• Renting vs. owning: Can you be financially secure without buying a home?

• Toronto housing bubble: Is it ready to pop?
• Tools to calculate your mortgage payments and costs in Canada
• What does the new Canadian Mortgage Charter mean for home owners?