If you have a loan coming up for renewal, and/or are looking at taking out a new loan, you may be wondering how the war in Iran is changing the cost of borrowing – and whether a fixed rate or variable rate term might be best for your operation.
There are many different factors to consider when choosing between a fixed and variable rate. This includes, but is not limited to, the timing of capital investments (loans being paid off, when new investments will be required); product features, including prepayment limits and fees; cash flow and structure of existing debt, including existing floating debt exposure; and one’s own risk tolerance.
In this article, we’ll look differences between different types and lengths of terms from a purely cash flow perspective. While we will use scenario analysis to get a deeper understanding of the differences between these products, we won’t get into interest rate projections themselves – we’ll have more to say on that when our Economic and Financial Market Update is released next month.
5-year fixed rate terms have recently fallen out of favour with Canadians
Our past analysis on this topic explored the differences between just two terms: variable rates and 5-year fixed rates. However, if you want to borrow fixed, you do not necessarily have to lock-in for five years as many fixed-rate terms are shorter.
In fact, the popularity of 5-year fixed rates has fallen recently. Last year, only 13% of residential mortgages were 5-year or longer fixed rate terms, where between 2013 and 2020 they were about one-third of all mortgages on average (Figure 1). At the same time, there has been a surge in the popularity of fixed terms from 3 to less than 5 years (i.e., 3- or 4-year terms). Indeed, terms of this length were the most popular type of term between 2023 to 2025, including accounting for nearly half (49%) of all mortgages in 2024.
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