Quick Answer
Choose fixed for payment certainty and easy budgeting. Choose variable/ARM if you can handle payment changes and expect rates to fall before your reset. Compare total 5-year cost using today's fixed rate vs. a rate path for variable (caps, margins). If a +1–2% rise breaks your budget, fixed is safer.
How fixed, variable, and ARMs work (terms, caps, margins)
Fixed Rate
- Rate: Stays same for entire term
- Payment: Never changes (predictable)
- Term: 15-30 years (US), 1-10 years (Canada)
- Risk: Interest rate risk to lender
Variable/ARM
- Rate: Changes with market conditions
- Payment: Can go up or down
- Benchmark: Prime (Canada), Fed funds/SOFR (US)
- Risk: Payment shock to borrower
Key Terms to Understand:
- Margin/Spread – Fixed amount added to benchmark (e.g., Prime + 0.5%)
- Caps – Maximum rate increase per adjustment/lifetime
- Floor – Minimum rate (often the margin)
- Adjustment frequency – Monthly, annually, or at renewal
Decision factors: budget tolerance, time horizon, rate outlook
Choose Fixed If:
- You need predictable payments for budgeting
- You're stretching to qualify (tight debt ratios)
- You expect rates to rise significantly
- You're risk-averse or new to homeownership
- Current fixed rates are historically attractive
Choose Variable/ARM If:
- You can handle payment increases of 20-30%
- You expect rates to fall or stay stable
- You plan to sell/refinance within 3-5 years
- Variable rate discount is substantial (>0.5-1.0%)
- You have stable, growing income
Break-even analysis: when does variable beat fixed?
Simple Break-Even Formula:
Monthly savings × months = total savings
If total savings > switching costs, variable wins
Example Scenario:
| Scenario | Fixed 5.5% | Variable starts 4.5% |
|---|---|---|
| $400k loan payment | $2,271/month | $2,027/month |
| Monthly savings | - | $244 |
| Break-even if rates rise to 5.5% | - | After 12 months |
| Variable wins if avg rate < | - | 5.5% over 5 years |
US vs. Canada: terms vs amortization; penalties for breaking
United States
- Common: 30-year fixed rate mortgages
- ARMs: 5/1, 7/1, 10/1 (fixed then adjustable)
- Prepayment: Usually no penalty
- Refinance: Relatively easy/common
- Rate caps: 2/2/5 typical (2% first, 2% periodic, 5% lifetime)
Canada
- Terms: 1-10 years (rate guarantee period)
- Amortization: 15-30 years (full payoff time)
- Variable: Rate changes monthly with prime
- Penalties: 3 months interest or IRD (higher)
- Portability: Often can transfer to new home
Real scenarios (first-time buyer, move in 3 years, investor)
First-Time Buyer (Tight Budget)
Recommendation: Fixed rate
Reason: Predictable payments, easier budgeting, less risk of payment shock while adjusting to homeownership costs.
Moving in 3 Years (Job Transfer)
Recommendation: Variable or short ARM
Reason: Lower initial rate, won't be exposed to long-term rate risk, savings over 3 years likely to exceed risk.
Real Estate Investor (Cash Flow Focus)
Recommendation: Depends on cash flow cushion
Reason: Variable if strong cash flow reserves; fixed if operating on thin margins or multiple properties.
Frequently Asked Questions
Can I switch from variable to fixed mid-term?
Canada: Often yes, at renewal or with penalties. US: Usually requires refinancing with closing costs.
What are typical prepayment penalties?
Canada: 3 months interest (variable) or IRD calculation (fixed). US: Most conventional loans have no prepayment penalty.
Are there hybrid mortgage options?
Yes—convertible mortgages (variable to fixed) and combination mortgages (part fixed, part variable) offer middle ground.
How do rate caps work on ARMs?
Caps limit increases: first adjustment cap (usually 2-5%), periodic cap (1-2% per adjustment), and lifetime cap (5-6% total increase).