Are variable rate mortgages cheaper than fixed in Canada?

Historically, variable rates have been lower than fixed rates on average over full mortgage terms. Studies by Dr. Moshe Milevsky and others found that variable rate borrowers paid less interest in roughly 88% of historical 5-year mortgage terms. However, this does not guarantee future outcomes, and the spread between variable and fixed rates — and your ability to tolerate rate increases — matters significantly.

What happens to variable rate mortgage payments when rates rise?

It depends on your variable rate structure. An adjustable rate mortgage (ARM) increases your monthly payment when the prime rate rises. A variable rate mortgage (VRM) keeps payments the same but changes the split between principal and interest — you pay more interest and less principal, potentially causing negative amortization if rates rise sharply.

Can I lock in a variable rate mortgage to a fixed rate?

Yes. Most Canadian lenders allow you to convert a variable rate to a fixed rate at any time, typically at the current fixed rate your lender is offering. You cannot lock in at a historically low fixed rate after the fact — you get today's fixed rate when you convert. There is usually no penalty to convert, but the new fixed rate may be higher than what you could have locked in originally.

What is the penalty to break a variable rate mortgage in Canada?

Breaking a variable rate mortgage typically costs 3 months of interest — significantly less than the Interest Rate Differential (IRD) penalty that applies to closed fixed rate mortgages. This is one of the biggest structural advantages of variable rate mortgages for borrowers who may need to sell or refinance.

Who should avoid a variable rate mortgage?

Variable rate mortgages are risky for borrowers on very tight budgets where a rate increase could cause payment stress, those who are anxious about financial uncertainty, retirees or near-retirees with fixed incomes, and people buying at the top of their qualification range. If rate increases would force you to cut essential spending or default, the fixed rate certainty is worth the premium.

Is a Variable Rate Mortgage Worth the Risk in Canada?

The Core Question

Variable rates are almost always lower than fixed rates when you sign. The question is whether the savings during low-rate periods outweigh the cost and stress during rate hikes — and whether you can afford the payments if rates rise.

Variable vs. Fixed: The Two Types of Risk

Risk type	Variable rate	Fixed rate
Payment certainty	No — payments may rise (ARM) or amortization extends (VRM)	Yes — payments guaranteed for term
Interest cost risk	Rate could rise above fixed	None during fixed term
Break penalty	Small (3 months interest)	Large (often IRD — can be thousands)
Locked out of refinancing	No — cheap to exit	Yes — IRD penalty can trap you
Renewal risk	Yes — rate could be high at renewal	Yes — same issue at renewal

ARM vs. VRM: Two Different Variable Products

Feature	Adjustable Rate Mortgage (ARM)	Variable Rate Mortgage (VRM)
Payment adjusts when prime changes	Yes	No
Amortization stays constant	Yes	May extend if rates spike
Negative amortization possible	No	Yes, if payments don’t cover interest
Payment shock when rates rise	Immediate	Deferred until trigger rate or renewal

Most major Canadian banks offer VRM-style products; many monoline lenders offer ARM-style. Know which you have before comparing rates.

Historical Performance of Variable vs. Fixed in Canada

Research by Dr. Moshe Milevsky (York University, widely cited in Canadian financial planning) analyzed Canadian mortgage data and found:

In approximately 88% of historical 5-year terms, the variable rate borrower paid less total interest than a comparable fixed rate borrower
The outperformance averaged roughly 1–1.5% annually on the outstanding balance in low-rate environments
The 12% of terms where fixed outperformed were concentrated in rising-rate environments — most recently 2022, when the Bank of Canada raised rates from 0.25% to 4.25% in 12 months

2022 was the most significant exception in decades. Variable rate borrowers who entered at rock-bottom rates in 2020–2021 saw prime rate climb from 2.70% to 7.20% — many faced payment increases of $500–$1,500/month on a $500,000 mortgage.

Cost Comparison Example

Assume a $500,000 mortgage, 25-year amortization.

Scenario A: Rates stay flat or fall

	Variable (prime − 0.90%)	Fixed (5-year)
Starting rate	5.55% (prime 6.45% − 0.90%)	5.89%
Monthly payment	~$3,075	~$3,200
5-year interest	~$125,000	~$136,000
Variable savings	~$11,000

Scenario B: Rates rise 2% over 2 years then stabilize

	Variable	Fixed
Starting payment	~$3,075	~$3,200
Payment at peak rate	~$3,650	~$3,200 (unchanged)
5-year interest	~$137,000	~$136,000
Variable savings	~$1,000 (small)

Scenario C: Rates rise 3%+ quickly (2022 repeat)

	Variable	Fixed
Starting payment	~$3,075	~$3,200
Payment at peak	~$4,000+	~$3,200
5-year interest	~$148,000	~$136,000
Fixed saves	~$12,000

The Break Penalty Advantage of Variable Rate

This is the most underappreciated benefit of variable rate mortgages: the exit cost.

Situation	Variable penalty	Fixed penalty
Sell home mid-term	3 months interest (~$5,000–$8,000)	IRD can be $15,000–$40,000+
Refinance to lower rate	3 months interest (usually cheap)	IRD — often makes refinancing uneconomic
Divorce or life change	Same low penalty	Large penalty can complicate settlement

If there is any chance you will need to break your mortgage before renewal, the variable rate’s 3-month interest penalty is significantly more flexible than the fixed rate’s IRD penalty.

Who Variable Rate Is Right For

Profile	Fits variable rate?
Stable income well above mortgage payments	Yes — rate increases are manageable
May sell or refinance within the term	Yes — low break penalty matters
Financially sophisticated, can monitor rate trends	Yes
Building an emergency fund / extra cash available	Yes — buffer for payment increases
Risk tolerant and history-aware	Yes

Who Should Choose Fixed Rate

Profile	Stick to fixed rate
Buying at the top of what you qualify for	Yes — no room for payment increases
Fixed income (retiree, disability)	Yes — certainty is essential
High anxiety about financial uncertainty	Yes — peace of mind has real value
Short-term savings not worth the risk concern	Possibly — current fixed/variable spread matters
First-time buyer, already stretched	Likely yes

The Spread Is What Matters Most

The decision should be driven by the spread between variable and fixed rates at the time you sign:

Spread (Fixed minus Variable)	Implication
0.10–0.30%	Barely worth the variable risk — consider fixed
0.50–0.75%	Moderate advantage to variable — worth considering
1.00%+	Strong historical advantage to variable; variable likely wins unless large rate hike occurs
Variable actually higher than fixed	Choose fixed — no reason to take rate risk

Always compare with your own numbers. One rate point on a $600,000 mortgage is about $6,000 per year — real money.