There is no universally right answer. There is a right answer for you.
Be wary of anyone who tells you fixed is always better, or that variable always wins in the end. The right choice depends on your tolerance for risk, the room in your budget, and your plans for the next few years.
Fixed rate
Your rate and your payment do not move for the whole term. You know exactly what you are paying for the next three or five years. In exchange for that predictability, the starting rate is generally higher than variable. One point often overlooked: the penalty for breaking a fixed term is calculated using the interest rate differential, a method that can cost several thousand dollars.
Variable rate
Your rate follows your lender’s prime rate, usually with a discount. When prime moves, your rate moves. Depending on the product, either your payment changes or the principal portion of your payment is adjusted. The penalty for breaking a variable term is usually limited to three months’ interest — considerably less than a fixed term.
The questions that actually decide it
1. Would a payment increase put you in difficulty? If so, fixed. Peace of mind has a value, and it is not measured in basis points.
2. Do you expect to sell or refinance before the end of the term? If it is likely, the penalty becomes a major factor — and there variable often has the advantage.
3. Is your income stable? Regular income absorbs a rate change better than irregular income does.
4. Will you check your rate every week? If a variable keeps you up at night, it is not for you, whatever the math says.
The term matters as much as the type
Three years or five is not a detail. If you think you will move in three years, a five-year term exposes you to a penalty. If you are settled for the long run, a longer term reduces how often you renew. Some lenders also offer hybrid products that split the loan between fixed and variable.