1. The Basics
When you get a mortgage in Canada, one of your most important decisions is choosing between a fixed or variable interest rate. This choice can save or cost you tens of thousands of dollars over the life of your mortgage.
Quick Definitions
- Fixed Rate: Your interest rate stays the same for your entire mortgage term (typically 5 years)
- Variable Rate: Your interest rate fluctuates with the Bank of Canada's prime rate
75%
Of Canadians Choose Fixed Rates
25%
Choose Variable Rates
2. Fixed Rate Mortgages
A fixed rate mortgage locks in your interest rate for the duration of your term. This means your mortgage payment stays exactly the same, regardless of what happens in the economy.
How Fixed Rates Work
When you sign up for a fixed rate mortgage:
- You lock in a specific interest rate (e.g., 4.59%)
- Your rate cannot change until your term ends (typically 1-10 years, most commonly 5)
- Your monthly payment remains constant
- You're protected from rate increases
Advantages of Fixed Rates
- Predictable Payments: You know exactly what you'll pay every month
- Budgeting Easier: No surprises makes financial planning simpler
- Peace of Mind: Sleep well knowing rising rates won't affect you
- Protection from Rate Hikes: If rates rise significantly, you're protected
- Good for Risk-Averse Borrowers: Ideal if you prefer stability over potential savings
Disadvantages of Fixed Rates
- Higher Starting Rate: Usually 0.5-1% higher than variable rates initially
- No Benefit from Rate Drops: If rates fall, you're stuck at your higher rate
- Expensive to Break: Breaking a fixed mortgage can cost $10,000-$30,000+ in penalties
- Less Flexibility: Harder and more costly to refinance or switch
Fixed Rate Terms Available
| Term Length |
Typical Rate Difference |
Best For |
| 1-Year Fixed |
Often similar to 5-year |
Short-term certainty, planning to move/refinance |
| 2-Year Fixed |
Usually lower than 5-year |
Expecting rates to drop soon |
| 3-Year Fixed |
Mid-range |
Moderate certainty, flexibility sooner |
| 5-Year Fixed |
Most Popular |
Standard choice, balanced approach |
| 7-Year Fixed |
Higher than 5-year |
Extra-long stability |
| 10-Year Fixed |
Highest rates |
Maximum rate protection, rare |
3. Variable Rate Mortgages
A variable rate mortgage has an interest rate that changes with the Bank of Canada's prime rate. When prime goes up or down, so does your rate.
How Variable Rates Work
Variable rates are calculated as:
Your Rate = Prime Rate +/- Your Discount/Premium
Example: If prime is 6.45% and you get prime minus 1.0%, your rate is 5.45%
When the Bank of Canada changes its policy rate:
- Banks adjust their prime rate (usually within 1-2 days)
- Your mortgage rate automatically changes
- Your payment may change (or stay the same with different principal/interest split)
Two Types of Variable Mortgages
| Type |
How It Works |
When Rate Changes |
| Adjustable Rate (ARM) |
Payment changes when rate changes |
Payment goes up or down immediately |
| Variable Rate (VRM) |
Payment stays the same, principal/interest split changes |
More goes to interest (or less) but payment unchanged |
Important: With a VRM, if rates rise significantly, you could hit your "trigger rate" where your payment doesn't cover the interest. This means you're adding to your principal instead of paying it down!
Advantages of Variable Rates
- Lower Starting Rate: Typically 0.5-1% lower than fixed rates
- Historically Cheaper: Studies show variable beats fixed about 70% of the time
- Benefit from Rate Drops: When rates fall, you save immediately
- Lower Penalties: Breaking costs only 3 months interest (vs thousands for fixed)
- More Flexibility: Easier to refinance or break without huge penalties
Disadvantages of Variable Rates
- Unpredictable Payments: Your payment can increase (ARM type)
- Budgeting Harder: Uncertainty makes planning more difficult
- Stress and Anxiety: Watching rate announcements can be stressful
- Risk of Rate Spikes: Rates can rise quickly in certain economic conditions
- Trigger Rate Risk: Could end up paying nothing toward principal
4. Side-by-Side Comparison
| Feature |
Fixed Rate |
Variable Rate |
| Starting Rate |
Higher (e.g., 5.49%) |
Lower (e.g., 4.95%) |
| Payment Stability |
Completely stable |
Can change monthly |
| Rate Changes |
Never during term |
Follows prime rate |
| Breaking Penalty |
Interest Rate Differential (IRD) - very expensive |
3 months interest only |
| Risk Level |
Low - no surprises |
Higher - rate uncertainty |
| Potential Savings |
Lower - pay premium for stability |
Higher - if rates stay low/drop |
| Best For |
Risk-averse, tight budget, rising rate environment |
Risk-tolerant, financial cushion, falling/stable rates |
| Typical Discount |
0.5-1.5% off posted rate |
Prime minus 0.5-1.5% |
Cost Example Over 5 Years
Scenario: $400,000 Mortgage, 25-year amortization
Fixed Rate at 5.49%:
- Monthly Payment: $2,486
- Total Interest (5 years): $105,780
Variable Rate starting at 4.95% (no rate changes):
- Monthly Payment: $2,383
- Total Interest (5 years): $95,340
- Savings: $10,440
Note: This assumes rates stay constant. In reality, variable rates fluctuate.
5. Historical Performance
Looking at Canadian mortgage history provides valuable insights:
What History Shows
70%
Of the time, variable rates have been cheaper
$20,000+
Average savings with variable over 25 years
30%
Of the time, fixed was the better choice
Key Historical Periods
- 1980s: Fixed was better (rates were falling from historic highs)
- 1990s-2000s: Variable was better (relatively stable, declining rates)
- 2008-2020: Variable dominated (ultra-low rate environment)
- 2020-2023: Fixed was better (rapid rate increases caught variable holders)
- 2024-2025: Uncertain (rates stabilizing, potential cuts ahead)
Past Performance Doesn't Guarantee Future Results: While variable has historically won, the 2020-2023 period showed that fixed can save you money during rapid rate increases. Every economic cycle is different.
6. Which Should You Choose?
Choose Fixed Rate If You:
✓
Have a Tight Budget: Can't afford payment increases
✓
Are Risk-Averse: Value peace of mind over potential savings
✓
Think Rates Will Rise: Believe we're in a low-rate environment
✓
Plan to Stay Long-Term: Won't need to break your mortgage
✓
Want Predictability: Need to know exact payments for budgeting
Choose Variable Rate If You:
✓
Have Financial Cushion: Can handle payment increases
✓
Are Comfortable with Risk: Don't lose sleep over rate fluctuations
✓
Think Rates Will Fall/Stabilize: Believe rates have peaked
✓
May Need Flexibility: Might sell, refinance, or break mortgage
✓
Want Lower Starting Rate: Willing to bet on historical trends
Decision Framework
Ask Yourself These Questions:
- Can I afford if my payment increases by $200-300/month?
- Do I sleep better with certainty or am I comfortable with calculated risk?
- Where do I think interest rates are headed?
- How long do I plan to stay in this home?
- What's the rate difference between fixed and variable right now?
- Do I have a financial emergency fund?
7. Hybrid Options
Can't decide? You can combine both approaches:
Combination Mortgages
Split your mortgage between fixed and variable rates:
Example Split
$500,000 Mortgage:
- $300,000 (60%) at Fixed Rate: Stability for most of your payment
- $200,000 (40%) at Variable Rate: Potential savings and flexibility
Benefits: Balanced risk, some predictability, potential for savings
Convertible Mortgages
Start variable, with the option to convert to fixed:
- Begin with a variable rate
- If rates start rising, convert to fixed at any time
- Usually can convert penalty-free
- Best of both worlds if you're unsure
Note: When converting, you typically get the lender's current fixed rate, which may not be their best rate. Shop around before converting.
8. Switching Between Rates
Breaking Your Mortgage
The penalties for breaking your mortgage differ significantly:
| Mortgage Type |
Penalty Calculation |
Typical Cost |
| Variable Rate |
3 months interest |
$3,000-$5,000 |
| Fixed Rate |
Greater of 3 months interest OR Interest Rate Differential (IRD) |
$10,000-$30,000+ |
When to Consider Switching
- Rates Drop Significantly: If fixed rates drop 2%+, breaking and re-financing might save money
- Selling Your Home: You'll need to pay the penalty unless you port your mortgage
- Variable Rates Rising Fast: Convert to fixed to lock in current rates
- Refinancing for Better Terms: Lower rate or better features might justify penalty
Penalty Calculator Rule of Thumb
Breaking a fixed mortgage typically costs: (Rate Difference × Remaining Balance × Remaining Term) ÷ 12
Example: 2% difference, $400K balance, 3 years left = $20,000 penalty
Calculate Your Mortgage Payments
Use our mortgage calculator to compare fixed and variable rate scenarios.
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Final Thoughts
There's no universally "correct" choice between fixed and variable rates. Your decision should be based on your personal financial situation, risk tolerance, and economic outlook.
Key Takeaways:
- Variable rates have historically been cheaper 70% of the time
- Fixed rates provide certainty and peace of mind
- Consider your budget flexibility and risk tolerance
- Rate environment matters - where rates are headed is important
- Breaking penalties are much higher for fixed mortgages
- You can combine both with a split mortgage
- Review your decision at each renewal
Last Updated: April 2026