fixed and variable rates
A fixed-rate mortgage locks in the interest rate for the entire term, meaning your principal and interest portions evolve according to a regular amortization schedule. Your monthly payment remains the same throughout the term, providing predictability for budgeting.
A variable-rate mortgage has an interest rate that can fluctuate with the prime rate. In Canada, variable-rate mortgages come in two main varieties: those with variable payments, where the payment size changes as the prime rate changes, and those with fixed payments, where the total payment stays the same but the interest portion changes, affecting how much of each payment goes toward principal. About three-quarters of variable-rate mortgages in Canada have fixed payments.
Sources: Bank of Canada
Key Differences at a Glance
The table below summarizes the most important differences between fixed and variable mortgage rates. Understanding these distinctions can help you match a mortgage type to your financial goals and risk tolerance.
| Feature | Fixed-rate mortgage | Variable-rate mortgage |
|---|---|---|
| Rate stability | Rate is locked for the entire term | Rate can fluctuate with prime rate |
| Monthly payment | Fixed for the duration of the term | Can be fixed (VRM) or variable (ARM); if fixed, interest portion changes |
| Interest rate risk | Protected from rising rates, but doesn't benefit if rates fall | Borrower assumes risk of rate increases, but benefits if rates fall |
| Prepayment penalty | Can be high, often based on interest rate differential | Typically lower, often three months' interest |
| Switch to other type | Cannot switch to variable without breaking contract | Can switch to fixed mid-term without penalty |
Sources: Bank of Canada, Ratehub.ca, NerdWallet Canada
Interest Rate Risk and Payment Stability
Fixed-rate mortgages shield you from interest rate increases during your term. If the Bank of Canada raises its overnight rate, your payment does not change. However, you also cannot benefit if rates fall. Fixed rates are primarily influenced by Government of Canada bond yields, not directly by the Bank of Canada's overnight rate.
Variable-rate mortgages expose you to interest rate risk. When the Bank of Canada changes the overnight rate, the prime rate—and your variable rate—can adjust. In a variable-rate mortgage with fixed payments, a rate increase can mean a larger portion of your payment goes to interest, reducing the amount applied to principal. If rates rise enough, you may reach your trigger rate: the interest rate at which your fixed payment covers only interest and no principal. In October 2022, about 50% of variable-rate mortgages with fixed payments had reached their trigger rate, representing about 13% of all Canadian mortgages.
Sources: Bank of Canada, Ratehub.ca
Penalty differences
Breaking a fixed-rate mortgage typically carries a higher penalty, often calculated using an interest rate differential (IRD), which can be significant if rates have fallen since you signed. In contrast, penalties for variable-rate mortgages are usually limited to three months' interest. These penalty structures can influence your flexibility if you need to break your mortgage early, for example when selling or refinancing.
Additionally, if you have a variable-rate mortgage, you can often switch to a fixed rate mid-term without penalty. This option is not available with a fixed-rate mortgage; switching to variable would require breaking your existing contract.
Sources: Ratehub.ca, NerdWallet Canada
Historical performance
Historically, variable-rate mortgages have often been less expensive over time than fixed-rate mortgages, but this has not always been the case. For instance, a well-known 2001 study by York University Professor Moshe Milevsky found that between 1950 and 2000, Canadian homeowners would have been better off with a variable mortgage almost 90% of the time. However, past performance does not guarantee future results.
In recent years, the Bank of Canada's rapid rate increases made variable-rate mortgages more costly for those who had them. For variable-rate mortgage holders with fixed payments who have not taken action, median payments are expected to increase by 54% between February 2022 and the end of 2027. Borrowers who took out a mortgage in 2021 or opted for a variable rate will generally have experienced the largest increases in payments by the end of 2026. By the end of 2026, virtually all mortgage holders who took out mortgages before March 2022 will go through a renewal cycle.
Sources: IG Wealth Management, nesto.ca, Bank of Canada
How to Choose: Factors to Consider
When deciding between fixed and variable mortgage rates, consider your financial stability, risk tolerance, and future plans. A fixed-rate mortgage offers predictable payments, which can be reassuring if you have a tight budget or prefer certainty. A variable-rate mortgage may offer lower initial rates and the potential for savings if rates remain stable or fall, but it comes with the risk of increased payments if rates rise.
Think about your timeline: if you plan to stay in your home for a short period, the lower penalty for breaking a variable mortgage might be appealing. If you are concerned about rising rates and want to lock in a payment you can afford, a fixed rate could provide peace of mind. Always review your mortgage agreement for specific terms, and consider consulting a financial advisor or mortgage professional to discuss your situation.
Sources: Ratehub.ca, IG Wealth Management, NerdWallet Canada
Frequently asked questions
Is a variable rate always cheaper than fixed?
No. Historically, variable rates have often been lower than fixed rates, but this is not guaranteed. In mid-2026, the best 5-year variable rate in Canada was around 3.35% compared to about 4.09% for the best 5-year fixed rate, but this gap can narrow or reverse. Future rate movements can make fixed rates more cost-effective if variable rates rise above the fixed rate you could have locked in.
Sources: Ratehub.ca, IG Wealth Management, nesto.caWhat happens if rates rise with a variable mortgage?
If you have a variable-rate mortgage with variable payments, your payment increases when the prime rate rises. If you have a variable-rate mortgage with fixed payments, your payment stays the same, but a larger portion goes toward interest, reducing your principal repayment. If rates rise enough that your payment only covers interest, you have reached the trigger rate. At that point, your lender may require you to increase your payment or make a lump-sum payment.
Sources: Bank of CanadaCan I switch from fixed to variable later?
You can switch from variable to fixed without penalty, as this is a common feature of variable mortgages. However, switching from a fixed-rate mortgage to a variable-rate mortgage would require breaking your fixed contract, which may involve a significant prepayment penalty calculated using the interest rate differential.
Sources: Ratehub.ca, NerdWallet CanadaHow do penalties differ between fixed and variable?
Fixed-rate mortgages typically carry higher penalties, often calculated using an interest rate differential (IRD), which can be large if interest rates have fallen. Variable-rate mortgages generally have lower penalties, usually equal to three months' interest. The exact penalty depends on your lender and mortgage terms.
Sources: Ratehub.ca, NerdWallet CanadaSources
- Variable-rate mortgages with fixed payments: Examining trigger rates - Bank of Canada — Bank of Canada
- Fixed vs. Variable Mortgage Rates | Comparing Pros and Cons | Ratehub.ca — Ratehub.ca
- Fixed vs. variable rate mortgages: which is right for you? — IG Wealth Management
- Fixed vs Variable Mortgage Rates - nesto.ca — nesto.ca
- Fixed vs. Variable: Choosing The Right Mortgage Rate - NerdWallet Canada — NerdWallet Canada
- The impact of higher interest rates on mortgage payments — Bank of Canada