Fixed vs Variable Mortgage Canada

How Fixed and Variable Rates Actually Work in Canada

A fixed-rate mortgage locks your interest rate for the whole term - typically five years in Canada. Your payment never changes during the term, which makes budgeting simple and protects you completely from rate rises. The trade-off is that you also miss out if rates fall, and you pay a premium for that certainty: fixed rates are usually priced a little above where variable rates start.

A variable-rate mortgage is priced as the lender's prime rate minus a discount - for example, prime minus 0.90%. When the Bank of Canada raises or cuts its policy rate, the big banks move their prime rates, and your rate follows. With most variable mortgages your payment stays the same but the split between interest and principal changes; with adjustable-rate mortgages the payment itself moves. Either way, your interest cost is live and exposed to every Bank of Canada decision.

The Case for Variable: Cheaper When Rates Fall

Variable rates have historically won more often than fixed over long periods, simply because lenders price a risk premium into fixed rates. If the Bank of Canada cuts rates during your term, a variable mortgage passes those savings to you automatically - no refinancing, no fees, no paperwork.

Variable mortgages are also far cheaper to break. The penalty for paying out a variable mortgage early is typically just three months' interest. On a $400,000 mortgage at 6%, that is roughly $6,000 - painful, but predictable and capped. For anyone who thinks they might sell, refinance, or move within the term, that predictability is valuable.

The Case for Fixed: Certainty Has a Price Worth Paying

Fixed rates buy you one thing variable cannot: a guaranteed payment for the full term. If the Bank of Canada hikes rates aggressively - as it did through 2022 and 2023 - fixed-rate borrowers sleep fine while variable borrowers watch their interest costs climb. For households with tight budgets, that certainty is not a luxury; it is the difference between comfortable and stretched.

Fixed rates also make long-term planning possible. If you know your payment to the dollar for five years, you can plan renovations, career changes, or a growing family around it. Variable rates introduce a genuine unknown into the biggest line item in most household budgets.

The Penalty Asymmetry: IRD Can Cost Thousands

Here is the detail that decides the comparison for many borrowers. Breaking a fixed-rate mortgage early triggers the greater of three months' interest or the interest rate differential (IRD) - and IRD penalties can be enormous. Lenders calculate IRD using their posted rates and remaining term in ways that routinely produce penalties of $10,000, $20,000 or more on a typical mortgage.

Variable mortgages, by contrast, almost always break for just three months' interest. So the real comparison is not just rate vs rate - it is flexibility vs certainty. If there is any meaningful chance you will sell, refinance, or need to break the mortgage within the term, the IRD risk on a fixed rate deserves as much attention as the rate itself. We have a full worked explanation of how lenders calculate these penalties in our guide to IRD in Canada.

• How IRD mortgage penalties are calculated in Canada

Break-Even Math: A $500,000 Illustrative Example

Take a $500,000 purchase with 20% down - a $400,000 mortgage on a 25-year amortization. Say the best 5-year fixed is 4.24% and the best variable is prime minus 1.00% - with prime at 4.45%, that is 3.45%. The fixed payment is roughly $2,156 a month; the variable payment is roughly $1,987 - about $170 a month less. The variable starts nearly 0.8 percentage points cheaper, so the fixed borrower is paying for certainty from day one.

For the fixed rate to win over the five years, variable rates need to rise and stay elevated. If the variable rate climbed to about 4.24% - the same as the fixed - the payments would be equal; only above that does fixed come out ahead. In other words, variable has a head start, and the fixed rate is a bet that rates rise enough to erase it. These are illustrative figures; your lender's exact payments will differ slightly.

That starting gap is the market's price for certainty. When variable starts well below fixed, as in this example, choosing fixed means paying an insurance premium against rate rises. When fixed starts cheaper than variable, the market is pricing in falling rates, and the math tilts the other way.

Who Should Choose Which

Variable tends to suit borrowers with financial breathing room - a payment increase would not break the budget - who can tolerate uncertainty and may benefit from rate cuts. It also suits anyone likely to sell or refinance mid-term, because the three-months'-interest penalty is so much cheaper than IRD. First-time buyers with stable jobs and an emergency fund often fit this profile.

Fixed tends to suit borrowers who value predictability above all: tight budgets, anyone buying at the top of their affordability range, and people who simply do not want to think about the Bank of Canada for five years. It also suits anyone who knows they will stay put for the full term, since the IRD penalty only bites if you break early.

There is no universally right answer - only the right answer for your risk tolerance, your plans, and the current gap between the two rates. This is general information, not personal financial advice; a qualified mortgage adviser can model both options against your actual numbers.

Run Your Own Numbers

The fixed-vs-variable decision comes down to payments: what would each option cost you per month, and how much would rates need to move to change the answer? A few minutes with a calculator beats hours of guesswork.

Try our free Canada mortgage calculator to compare monthly payments at fixed and variable rates side by side, and see exactly where your break-even point sits.

• Compare fixed and variable payments

Sources

The figures and policy details in this article come from the following primary sources, checked at the time of writing.

• Bank of Canada policy interest rate
• OSFI minimum qualifying rate for uninsured mortgages