Thinking about buying a house in 2025? You’re not alone if you're feeling overwhelmed by the mortgage options. With interest rates constantly shifting, inflation slowly cooling, and the Bank of Canada still weighing its next moves, it’s tough to know what makes the most sense.
One of the biggest decisions you'll face: fixed-rate or adjustable-rate mortgage? It's not just how much you pay monthly; your decision can also influence how much you end up paying in the long run, how secure you feel, and even whether you get to change your loan in the future.
Whether you're buying or refinancing, now’s the time to understand your home loan choices.
Let’s break it down.
A fixed-rate mortgage is fairly an easier, simpler and common practice. More like a go-to option for most homebuyers when purchasing their home. With this option, your interest rate stays the same throughout the tenure of the loan you have taken and doesn't have an impact on your monthly payment cycle with the ever changing uncertain market.
In Canada, this usually means locking in your rate for a specific time, typically 1, 3, or 5 years, though your mortgage may still be paid off over 25 or 30 years.
Most individuals opt for a fixed term of 5 years, and this is for good reason. If you plan on staying put in the home and not wanting any surprises, such a loan always gives you peace of mind even if interest rates go up during your term.
An adjustable-rate mortgage, or ARM, is a bit more flexible but also riskier. It usually begins with a lower interest rate for the first few years, like 5 or 7 years, but after that, the rate can change depending on the market.
This option can work best if one is thinking about moving or upgrading homes within a year or two, or one believes that the interest rate can soon drop and is prepared to refinance.
When comparing ARM vs FRM, it really comes down to one thing: do you value predictability or flexibility?
The main point is that you'll most likely renew your mortgage every 3 to 5 years, regardless of anything else. So the best approach is to focus on the next few years, rather than thinking about much longer time frames.
According to statistics from Canada's central bank, about 60% of mortgages renewing in that time span are fixed-rate contracts. This means that the borrower's monthly payments may increase by 10% to 20% by the end of 2024, even with the recent interest rate cuts. Homeowners with adjustable-payment mortgages might in fact see their payments go down between 5 percent and 7 percent if the Bank of Canada (BoC) decreases its prime-linked interest rates and lender spreads start getting smaller.
Institutions like Perch and Altrua predict that by the end of this year, five-year adjustable-rate loans will drop to around 4.0%. Fixed rates might drop a little but will still stay high because of the connection with bond yields. Consequently, fixed-rate borrowers will be left with very little easing.
This makes adjustable-rate mortgages attractive for people who benefit from longer periods in their homes, but those lower renewal costs and potentially lower payments for ARMs could induce more people to take advantage of them. On the other hand-fixed-rate mortgages still provide stability for those planning to stay longer.
When considering fixed vs adjustable mortgage, there's no winner; only what best fits your financial profile and goal.
Choose Fixed-Rate Mortgage if:
Opt for an ARM if:
Also consider how secure your job is, how much you might earn in the future, and whether a refinance will be worth pursuing later.
When making a decision, consider the following:
Even slight differences in cost, structure of the loans, or caps on rate differences can really increase your total costs. This is particularly true for ARMs.
Make an Informed Choice
Take your time to understand your needs and the market before deciding. Take advantage of comparative tools to study the different possible rates, test real numbers against each option, and gain valuable insights from experts before putting your signature on the dotted line.
Whether you favor a fixed-rate loan with absolute stability or an ARM with flexible choices, one smart, informed decision made in 2025 could save you thousands, not to mention years of headaches.
