Fixed vs variable mortgage in Canada: how to decide
Choosing between a fixed and a variable rate is the biggest decision after the price itself. A fixed rate buys certainty; a variable rate usually starts lower but moves with the Bank of Canada. Neither is “right” in general. Here’s how each works in Canada, what the trade-off looks like in dollars, and the questions that should decide it for you.
How each one works
| Fixed rate | Variable rate | |
|---|---|---|
| Rate during the term | Locked for the whole term, usually 1 to 5 years | Your lender’s prime rate plus or minus a set amount; moves when prime moves |
| Payment | The same every time | Either changes with the rate (adjustable) or stays the same while the split between interest and principal changes (fixed-payment variable) |
| Compounding | Semi-annual, by law in Canada | Usually monthly |
| Penalty to break | Usually the greater of three months’ interest or the interest rate differential (IRD), which can be thousands of dollars | Usually three months’ interest |
| Qualifying | The same stress test for both: you must qualify at the higher of your contract rate plus 2% or 5.25% | |
A worked example: $500,000 over five years
A $500,000 mortgage, 25-year amortization, monthly payments, comparing a 5-year fixed at 4.19% with a variable starting at 3.95%. These rates are for illustration, not current quotes. Variable payments here adjust when the rate changes.
| Scenario | Monthly payment | Interest over 5 years | Balance after 5 years |
|---|---|---|---|
| Fixed at 4.19% | $2,681.85 throughout | $97,610 | $436,699 |
| Variable, rate never changes | $2,625.40 throughout | $92,662 | $435,138 |
| Variable, rate falls 0.5 points after 2 years | $2,625.40, then $2,498.58 | $85,693 | $432,735 |
| Variable, rate rises 1 point after 2 years | $2,625.40, then $2,889.41 | $106,684 | $439,656 |
Two things stand out. First, the variable starts about $56 a month cheaper and saves about $5,000 in interest if rates simply stay put. Second, a one-point rise two years in costs roughly $9,000 more than the fixed over the term, and adds about $264 a month to the payment from that point on. The question isn’t which is cheaper on paper; it’s which risk you can live with.
Run your own numbers with our mortgage comparison calculator, which handles Canadian compounding for both rate types.
Fixed-payment variable mortgages and the trigger rate
Some lenders keep a variable-rate payment the same when rates rise, so more of each payment goes to interest and less to principal. If rates rise far enough, the payment no longer covers the interest at all. That point is the trigger rate. Lenders handle it differently: some raise your payment, some ask for a lump sum, and some let the amortization stretch until renewal. Ask your lender exactly what happens before you sign.
The penalty difference matters more than people expect
Most people don’t plan to break their mortgage, but many do: they sell, move, separate, or refinance. On a variable mortgage, the penalty is usually three months’ interest. On a fixed mortgage at a big bank, the IRD can be several times that, especially when rates have fallen since you signed. If there’s a real chance you’ll sell or refinance before your term ends, that alone can tip the decision toward variable, or toward a shorter fixed term. Our refinance calculator shows when breaking pays off once you enter the penalty your lender quotes.
Questions that should decide it
- Could your budget absorb a higher payment? If a few hundred dollars more a month would cause real hardship, the certainty of a fixed rate is worth paying for.
- How likely are you to break the mortgage early? A move, a growing family or a planned refinance all favour variable or a shorter term.
- How big is the gap between fixed and variable? A small gap means you’re paying little for certainty. A wide gap means the variable has more room to rise before it costs more.
- How will you feel when rates rise? If rate headlines would keep you up at night, that has a cost too.
A middle option
Some lenders offer hybrid mortgages, part fixed and part variable, or shorter fixed terms that let you reassess sooner. Most variable mortgages also let you lock into a fixed rate partway through the term, usually at the lender’s fixed rate on that day for a term at least as long as what’s left. Ask before you sign whether conversion is allowed and on what terms.
Sources
- Financial Consumer Agency of Canada, Interest on mortgages
- Financial Consumer Agency of Canada, Breaking your mortgage contract
- OSFI, Minimum qualifying rate for uninsured mortgages
- Payment figures calculated with the same method as our mortgage calculator
This guide is general information, not financial advice. Your contract, your lender’s penalty method and current rates decide your actual costs. Talk to your lender or a mortgage broker before you choose.