Fixed vs Variable Mortgage in Canada: How to Choose
A fixed rate mortgage buys certainty. A variable mortgage buys flexibility and, historically, often a lower total cost — at the price of not knowing exactly what you'll pay. Neither is right for everyone. Here is how each one works in Canada, what it costs to get out of, and how to decide.
Key takeaways
- A fixed rate stays the same for the whole term. A variable rate moves with your lender's prime rate.
- Canada has two kinds of variable: one where the payment stays the same and the split between interest and principal moves, and one where the payment itself changes.
- Breaking a fixed mortgage early can cost far more than breaking a variable one.
- The five-year fixed is the most popular term, not automatically the cheapest.
What a fixed rate mortgage is
With a fixed rate mortgage, your interest rate — and therefore your payment — is locked for the term, whether that's one year or ten. If rates rise, you're protected until renewal. If they fall, you keep paying the higher rate unless you break the mortgage, which usually means a penalty.
The 5 year fixed rate is Canada's default: long enough to plan around, short enough that lenders price it competitively. Fixed rates follow Government of Canada bond yields, so they can move before the Bank of Canada changes anything. Our guide to how mortgage rates are set explains why.
What a variable mortgage is
A variable mortgage is priced as prime plus or minus a fixed amount, for example "prime minus 0.40%". The discount is locked for the term; prime is not. When the Bank of Canada changes its policy rate, prime — and your rate — usually changes the same day.
Lenders offer two versions, and the difference matters:
| Variable rate, fixed payment | Adjustable rate (ARM) | |
|---|---|---|
| When prime rises | Payment stays the same; more of it goes to interest, less to principal | Payment rises |
| When prime falls | Payment stays the same; you pay down principal faster | Payment falls |
| The risk to watch | The "trigger rate" — the point where the payment no longer covers the interest | Cash flow: your monthly cost can change at any time |
If your mortgage reaches its trigger rate, the lender will normally ask you to raise the payment, make a lump-sum payment or convert to fixed. Your contract says which.
What it costs to break each one
This is where the two diverge most, and where many borrowers are caught out. If you sell without porting, refinance, or switch lenders mid-term, you pay a prepayment penalty:
- Variable mortgages usually charge three months' interest.
- Fixed mortgages usually charge the greater of three months' interest or the interest rate differential (IRD). The IRD compares your rate with what the lender can lend at today for the time left on your term — and if the lender uses its posted rate in that formula, the penalty can run to many thousands of dollars.
If there's a real chance you'll move, separate, or need to refinance within the term, that difference can outweigh any rate advantage.
Fixed or variable: how to decide
| A fixed rate mortgage tends to suit you if… | A variable mortgage tends to suit you if… |
|---|---|
| Your budget can't absorb a higher payment | You have room in your budget if rates rise |
| You expect to keep the mortgage to the end of the term | You might sell, move or refinance before the term ends |
| You'd lose sleep watching rate announcements | You're comfortable riding out rate changes |
| Fixed rates are at or below variable rates | Variable rates are meaningfully below fixed |
Many variable mortgages let you convert to a fixed rate during the term without penalty, usually into a term at least as long as what's left. That option takes some of the risk out of starting variable. Ask for it in writing.
Other options worth knowing
- Shorter fixed terms. A best 3 year fixed rate mortgage can make sense if you expect rates to fall but want payment certainty in the meantime.
- Hybrid mortgages. Some lenders split one mortgage into fixed and variable portions, each with its own rate.
- Open vs closed. Most mortgages are closed: lower rate, limited prepayments. A variable closed mortgage is the common choice; open mortgages cost more but can be paid off any time without penalty.
The stress test applies either way
Whichever you choose, federally regulated lenders qualify you at the greater of your contract rate plus 2% or 5.25%. A lower variable rate can therefore mean a lower qualifying rate too. See how much mortgage you can afford.
Sources
This article is general information, not financial advice. Product features, penalty calculations and qualification rules vary by lender. Mortgage financing is subject to lender approval.
Frequently asked questions
It depends on the gap between the two rates, how long you expect to keep the mortgage, and how much payment change your budget can take. When fixed rates are below variable, fixed is usually the easier choice. When variable is well below fixed, variable deserves a serious look.
The one with a competitive rate and fair terms: a penalty calculated on a discounted rather than posted rate, good prepayment privileges and portability. Compare offers on all of those, not on rate alone.
Most variable mortgages allow conversion to a fixed term without penalty. You'll get the lender's fixed rate on the day you convert, not the rate when you signed.
As your lender's prime rate plus or minus a discount that's fixed for the five years. Prime moves with the Bank of Canada's policy rate.
Because the penalty is often the interest rate differential, which compensates the lender for lending your money out at today's lower rates for the rest of your term. Variable mortgages usually charge only three months' interest.
Compare fixed and variable on your own numbers
We'll quote both from several lenders, show the penalty formula for each, and let you decide with the facts in front of you.