Fixed vs Variable Mortgage Rates in Canada

The fixed vs variable mortgage rate decision comes down to how much certainty you want versus how much rate risk you can tolerate. A fixed rate locks your payment for the term; a variable rate moves with your lender's prime rate, so your cost can fall or rise. Neither is universally better, and the right answer depends on your budget, timeline, and temperament.

The short answer

Choose a fixed rate when a predictable payment matters more than the chance of paying less. Choose a variable rate when you can absorb an increase and want to benefit if rates decline. Historically variable rates have often cost less over long periods, but that record is not a guarantee, and a variable borrower must be ready for payments or interest to climb.

The comparison also depends on the term you choose. A one-year fixed rate and a five-year fixed rate behave differently, and a variable rate over a long horizon is a different bet from a variable rate over a short one. Match the product to the time you expect to hold the mortgage.

One more factor is your own behaviour. A borrower who watches every rate announcement and worries about payments may be better off with certainty even if the math slightly favours variable. A borrower who can shrug off a higher payment and has savings to cover it is better positioned to take the variable bet. The product should match the person holding it.

How each rate is set

A fixed mortgage rate is priced largely off Government of Canada bond yields for a similar term, plus the lender's spread. When bond yields rise, fixed rates tend to follow, and vice versa. A variable rate is quoted as prime plus or minus a spread, and prime itself responds to the Bank of Canada policy rate. The Bank of Canada policy rate is the lever that moves variable borrowing costs.

Because these two markets respond to different forces, fixed and variable rates do not always move together. It is possible to see fixed rates fall while variable rates hold steady, or the reverse. That is why comparing the two today tells you about today's pricing, not about which one will win over the next several years.

Lenders also price in their own funding costs, competition, and the type of mortgage. Two lenders can quote different fixed rates on the same day even though both are reacting to the same bond market, which is another reason to compare offers rather than accept the first one you receive.

What happens when rates move

With a fixed rate, nothing changes until your term ends, at which point you renew at whatever rates then apply. With a variable rate, the lender passes prime changes through. Depending on your contract, either your payment adjusts, or your payment stays the same and the split between interest and principal shifts. In a rising-rate environment, a variable borrower can find that almost the entire payment is interest, and on some products the balance can grow if the payment no longer covers the interest.

At renewal, a fixed-rate borrower faces renewal risk, while a variable borrower has lived with rate movement all along. The prime rate and the policy rate are worth following if you choose variable, because they tell you which way your cost is likely to move next.

Penalties when you break the mortgage

This is where the two products differ sharply. Breaking a closed variable mortgage usually costs three months' interest. Breaking a closed fixed mortgage can trigger an interest rate differential (IRD) penalty, which is calculated from the gap between your rate and current rates for the remaining term and can be much larger. If there is any chance you will sell or refinance before the term ends, weigh that penalty carefully.

Comparing the trade-offs honestly

A lower starting rate is not automatically the cheaper mortgage. Compare the penalty formula, the prepayment privileges, whether the rate is compounded the same way, and what happens at renewal. A variable rate that saves a little each month can be erased by one increase, and a fixed rate that costs more each month buys certainty you may value highly. Run both scenarios through the fixed vs variable calculator before deciding.

Some borrowers split the difference with a hybrid mortgage, which divides the balance between a fixed and a variable portion, or with a convertible mortgage that starts variable and can be locked into a fixed rate later. These options are not free of trade-offs, but they can suit someone who wants partial protection. If you are also deciding on prepayment flexibility, the open versus closed mortgage comparison covers that separate choice.

Who should choose fixed, and who should choose variable

Choose fixed if your budget has little slack, if you would lose sleep over a payment increase, or if you plan to stay for the full term and want to know your costs. Choose variable if you have an emergency fund, if your income is stable, if you can tolerate a higher payment, and if you expect rates to fall or remain low.

If you are still unsure, ask yourself what would happen if your payment rose at the next rate announcement. If the answer involves cutting essentials or missing a payment, fixed is the safer fit. If the answer is that you would absorb it from savings and keep going, variable is a reasonable option.

Some borrowers split the difference with a hybrid or a mix of fixed and variable portions. Neither choice guarantees savings, and both should be confirmed against current rates with your lender before you sign.