Choosing between a fixed and variable mortgage rate is one of the biggest financial decisions Canadian homebuyers face. This guide breaks down the differences, historical performance, and how to choose the right option for your situation.
Fixed vs variable mortgage: quick comparison
| Feature | Fixed Rate | Variable Rate |
|---|---|---|
| Interest rate | Locked for the full term | Fluctuates with prime rate |
| Payment predictability | Payments never change | Payments may change |
| Starting rate | Typically higher | Typically lower |
| Penalty to break | Greater of 3 months interest or IRD (expensive) | Usually 3 months interest (cheaper) |
| Benefits from rate drops | No (locked in) | Yes (payments decrease) |
| Protected from rate hikes | Yes (locked in) | No (payments increase) |
| Best for | Risk-averse borrowers, tight budgets | Risk-tolerant borrowers, falling rate environments |
| Typical term | 1–5 years (5 most common) | 3–5 years (5 most common) |
How fixed-rate mortgages work
A fixed-rate mortgage locks your interest rate for the duration of your mortgage term. If you sign a 5-year fixed at 4.19%, you pay that rate for all five years regardless of what happens with the Bank of Canada rate or the broader economy.
Your rate is determined by:
- The Government of Canada 5-year bond yield (the benchmark for 5-year fixed rates)
- The lender’s spread above that benchmark
- Your credit score, down payment, and overall qualification
Fixed rates do not move with the Bank of Canada overnight rate. They are driven by the bond market, which reflects investor expectations about future inflation and interest rates.
Advantages of fixed rates
- Budget certainty — Your mortgage payment is exactly the same every month for the entire term
- Protection from rate increases — If rates rise significantly, you are insulated
- Simplicity — No need to monitor rate announcements or adjust your budget
Disadvantages of fixed rates
- Higher starting rate — You typically pay a premium of 0.5%–1.0% over the equivalent variable rate
- Expensive to break — The IRD penalty for breaking a fixed mortgage can cost $10,000–$30,000+ depending on the size of your mortgage and how far rates have fallen since you signed. Use our mortgage penalty calculator to estimate this cost.
- No benefit from falling rates — If rates drop during your term, you are stuck paying the higher fixed rate
How variable-rate mortgages work
A variable-rate mortgage is priced as a discount (or premium) to your lender’s prime rate. For example, if prime is 4.95% and your rate is prime – 0.80%, your current rate is 4.15%.
When the Bank of Canada raises or lowers its overnight rate, the prime rate at Canadian banks adjusts accordingly, and your variable rate moves with it.
There are two types of variable-rate mortgages:
- Adjustable-rate mortgage (ARM) — Your payment amount changes when the rate changes. If rates drop, your payment decreases; if rates rise, your payment increases.
- Variable-rate with fixed payment — Your payment stays the same, but the proportion going to principal vs. interest changes. If rates rise, more of your payment goes to interest and less to principal, extending your amortization.
Advantages of variable rates
- Lower starting rate — Variable rates are usually 0.5%–1.0% lower than comparable fixed rates
- Cheaper to break — The penalty is typically just 3 months of interest, which is much less than the fixed-rate IRD penalty
- Benefits from rate decreases — If the Bank of Canada cuts rates, your interest cost drops immediately
- Historical cost advantage — Studies have shown that variable-rate borrowers have paid less than fixed-rate borrowers the majority of the time over the past several decades
Disadvantages of variable rates
- Payment uncertainty — Your costs can increase if rates rise
- Potential for trigger rate — With fixed-payment variable mortgages, if rates rise enough that your monthly payment no longer covers the interest, you may hit a “trigger rate” requiring you to increase your payment or make a lump sum payment
- Stress during rate hikes — Rising rates can cause financial and emotional stress even if you can afford the higher payments
Historical performance: fixed vs variable
Research from Moshe Milevsky at York University found that Canadian borrowers who chose variable-rate mortgages paid less interest than those who chose fixed rates approximately 90% of the time over a 50-year study period (1950–2000). More recent analysis covering 2000–2024 suggests the advantage has narrowed but variable rates still come out ahead more often than not.
Key historical patterns:
- During rate-cutting cycles — Variable rates provide the most savings (e.g., 2008–2009, 2015–2016, 2024–2026)
- During rate-hiking cycles — Fixed rates protect you (e.g., 2022–2023 when the Bank of Canada raised rates from 0.25% to 5.00%)
- Over full 5-year terms — The variable rate starting lower and benefiting from some cuts during the term has historically outweighed the periods where rates rise
Important caveat: Past performance does not guarantee future results. The 2022–2023 rate hike cycle was the fastest in Canadian history and caught many variable-rate borrowers off guard. Consider your ability to handle a worst-case scenario before choosing variable.
How to decide: fixed or variable?
Choose fixed if:
- You are on a tight budget and cannot absorb higher payments
- You are a first-time buyer and want payment certainty while you adjust to homeownership
- You believe rates will rise significantly from current levels
- You value peace of mind over potential savings
- Your debt service ratios are close to the maximum allowed
Choose variable if:
- You can comfortably handle payments that are $200–$400/month higher than your starting payment
- You believe rates will hold steady or decline from current levels
- You may sell or refinance before your term ends (cheaper penalty)
- You are comfortable monitoring rate announcements and adjusting your budget
- You want to pay less overall based on historical trends
Choose a short-term fixed (1–3 years) if:
- You want some payment certainty but expect rates to be lower when you renew
- You prefer a middle ground between full fixed and variable
- The penalty for breaking a shorter term is lower than a 5-year fixed
Current rate environment (March 2026)
The Bank of Canada has been on a rate-cutting path since mid-2024, bringing the overnight rate from 5.00% to 2.75% as of March 2026.
| Rate Type | Approximate Range |
|---|---|
| Bank of Canada overnight rate | 2.75% |
| Prime rate | 4.95% |
| 5-year variable (prime – discount) | 3.90% – 4.30% |
| 5-year fixed | 3.80% – 4.30% |
| 3-year fixed | 3.70% – 4.10% |
| 1-year fixed | 4.50% – 5.00% |
With the overnight rate at 2.75%, variable rates have already benefited significantly from the rate cuts. The key question is whether further cuts are coming. If rates continue to decline, variable borrowers will see additional savings. If rates hold steady or rise, the fixed rate provides certainty.
Compare current mortgage rates across lenders to find the best deal.
The impact of rate changes on payments
Here is how a 0.25% rate change affects monthly payments on common mortgage amounts. Use our mortgage calculator to model your specific scenario.
| Mortgage Amount | Payment at 4.00% | Payment at 4.25% | Monthly Difference |
|---|---|---|---|
| $300,000 | $1,578 | $1,617 | $39 |
| $400,000 | $2,104 | $2,156 | $52 |
| $500,000 | $2,630 | $2,695 | $65 |
| $600,000 | $3,156 | $3,234 | $78 |
| $700,000 | $3,682 | $3,773 | $91 |
Based on a 25-year amortization.
Over a full 5-year term, even small rate differences add up. A 0.50% lower rate on a $500,000 mortgage saves approximately $7,500 in interest over five years.
Mortgage penalty comparison
One of the most overlooked factors in the fixed vs. variable decision is the cost of breaking your mortgage early. Most Canadians do not hold their mortgage for the full 5-year term — life changes such as job relocations, divorce, upsizing, or refinancing to access equity often force an early break.
| Penalty Type | Fixed Rate | Variable Rate |
|---|---|---|
| Calculation | Greater of 3 months interest or IRD | 3 months interest |
| Typical cost on $400,000 mortgage | $8,000 – $25,000+ | $3,000 – $5,000 |
| When it hurts most | When rates have dropped since signing (IRD spikes) | Always modest |
Use our mortgage penalty calculator to estimate the cost for your specific situation.
Fixed vs variable: special considerations
At renewal time
Whether you are on a fixed or variable mortgage, you will need to renew your mortgage at the end of each term. This is an opportunity to switch between fixed and variable without penalty. Compare the rates available at renewal and reassess your risk tolerance and financial situation.
With extra payments
Both fixed and variable mortgages allow prepayment privileges (typically 10–20% of the original mortgage per year). Making extra payments or increasing your payment amount can significantly reduce your amortization and total interest costs regardless of rate type.
For the mortgage stress test
All borrowers must qualify under the mortgage stress test, which uses the higher of your contracted rate + 2% or the qualifying rate floor of 5.25%. This applies to both fixed and variable mortgages, so both types have a built-in buffer against rate increases.
Related calculators
- Mortgage Calculator — Calculate your monthly mortgage payment
- Mortgage Affordability Calculator — See how much home you can afford
- Mortgage Penalty Calculator — Estimate the cost of breaking your mortgage
- Mortgage Renewal Calculator — Plan for your upcoming renewal
- Mortgage Refinance Calculator — Explore refinancing options
- Mortgage Stress Test Calculator — Check qualification under the stress test
- Interest Rate — Track the Bank of Canada rate
- Mortgage Rates — Compare current fixed and variable rates