On this page
- What is a fixed-rate mortgage?
- What is a variable-rate mortgage?
- Key differences between fixed vs variable rate mortgages
- Pros and cons of fixed vs variable rate mortgages
- How interest rate changes affect your payments
- How to decide which mortgage type is best for you
- Common mistakes when choosing mortgage rates
Choosing a mortgage is one of the biggest financial decisions you’ll make as a Canadian homeowner. The interest rate you select affects your monthly payments, your budget flexibility, and how much you’ll pay over the life of your loan.
Should you lock in a fixed rate for predictability, or take a chance with a variable rate that might save you money?
Understanding fixed vs variable rate mortgages helps you make a confident decision that protects your finances and fits your lifestyle. Fixed mortgage rates offer stability with consistent payments, while variable mortgage rates provide flexibility and potential savings when rates fall.
Both options have advantages and trade-offs, and the right choice depends on your budget, future plans, and comfort with financial risk.
What is a fixed-rate mortgage?
A fixed-rate mortgage locks your interest rate for the entire term, giving you predictable monthly payments regardless of market changes.
How fixed rates work
Fixed mortgage rates stay the same from the day you sign your mortgage agreement until the end of your term. Whether rates rise or fall in the broader economy, your rate never changes.
This means your monthly principal and interest payments remain constant, making budgeting straightforward. Lenders set fixed mortgage rates based on Government of Canada bond yields.
Typical terms in Canada
Most Canadians choose terms between one and ten years for fixed vs variable rate mortgages, with five-year terms being the most popular. The best five-year fixed mortgage rate in Canada is around 3.79%, while three-year fixed rates sit at approximately 3.69%.
Who a fixed-rate mortgage is best for
Fixed rates work well for people who value certainty over potential savings. This option suits first-time buyers adjusting to homeownership costs, families on tight budgets, or anyone who would lose sleep worrying about rising rates.
Fixed rates also make sense if you believe interest rates will rise during your term.
What is a variable-rate mortgage?
A variable-rate mortgage fluctuates with changes to lenders’ prime rates, which track the Bank of Canada’s policy rate.
How variable rates track the prime rate
Variable mortgage rates move up or down in response to changes in the Bank of Canada’s overnight lending rate. When the Bank of Canada lowers its rate, lenders reduce their prime rates within days, and your mortgage rate drops accordingly.
The prime rate currently sits at 4.45%. Most variable mortgages are priced as prime minus a discount.
Types of variable products (ARM vs VRM)
Variable-rate mortgages come in two structures. An adjustable-rate mortgage (ARM) changes your payment amount when rates change.
A variable-rate mortgage (VRM) with a fixed payment keeps your monthly payment the same when rates change. Instead, the split between principal and interest adjusts.
Who a variable mortgage is best for
Variable rates suit borrowers who can handle uncertainty and have financial flexibility. If you can absorb payment increases without stress, variable rates often save money over time.
Variable mortgages work well for people who believe rates will fall or remain stable, those who plan to pay off their mortgage quickly, or borrowers with irregular income who appreciate lower penalties for breaking their mortgage early.
Key differences between fixed vs variable rate mortgages
Understanding the core distinctions helps you evaluate fixed vs variable interest rates for your situation.
Interest rate stability
The biggest difference is predictability. Fixed mortgage rates never change during your term, while variable mortgage rates fluctuate with market conditions. Fixed rates protect you from increases but prevent you from benefiting when rates fall.
Monthly payment predictability
Fixed-rate mortgages deliver identical payments every month, which simplifies budgeting and financial planning. Variable-rate mortgages with adjustable payments change month to month, requiring you to adjust your budget when rates shift.
Risk tolerance and market sensitivity
Choosing between fixed vs variable rate mortgages comes down to how much risk you can stomach. Fixed rates eliminate interest rate risk entirely, but you might pay more than necessary if rates fall.
Variable rates expose you to market risk but let you benefit when rates decline.
Penalties for breaking the mortgage
Breaking your mortgage early costs money with both types, but the penalty structures differ dramatically. Fixed-rate mortgages typically charge the greater of three months’ interest or an interest rate differential calculation, which can reach tens of thousands of dollars.
Variable-rate mortgages usually only charge three months’ interest as a penalty, making them much cheaper to break.
Long-term financial implications
Over long periods, variable rates have historically cost borrowers less total interest than fixed rates. However, this isn’t guaranteed and depends entirely on how rates move during your term.
Pros and cons of fixed vs variable rate mortgages
Weighing the advantages and disadvantages of fixed vs variable mortgage choices helps clarify which option aligns with your goals.
Fixed-rate pros
Fixed mortgage rates deliver complete predictability. Your payment never changes, making it easy to budget and plan for other expenses. You’re protected from rate increases, which provides peace of mind during uncertain economic times.
Fixed-rate cons
The main downside is missing out on savings when rates fall. Breaking a fixed mortgage early often triggers expensive penalties that can cost you thousands more than breaking a variable mortgage. Fixed rates also typically start higher than variable rates.
Variable-rate pros
Variable rates usually start lower than fixed rates, saving you money immediately. When the Bank of Canada cuts rates, your rate drops automatically, reducing your interest costs. Variable mortgages come with much lower penalties if you need to break them early.
Variable-rate cons
The biggest drawback is uncertainty. Your rate can rise at any time, increasing your payments or reducing how much principal you pay down. Variable rates require financial flexibility and comfort with risk.
How interest rate changes affect your payments
Real scenarios show how fixed vs variable rate mortgages respond to rate movements.
Scenario: rising rates
Imagine you have a $500,000 mortgage at a variable rate of 3.45% with a 25-year amortization. Your monthly payment starts around $2,460.
If the Bank of Canada raises rates by 0.50%, your rate climbs to 3.95%, and your payment increases to approximately $2,575. That’s an extra $115 monthly. With a fixed-rate mortgage at 3.79%, your payment would be roughly $2,535 monthly and would never change.
Scenario: falling rates
Using the same $500,000 mortgage, imagine you start with a variable rate of 3.45% and monthly payments of $2,460.
If the Bank of Canada cuts rates by 0.50%, your rate drops to 2.95%, and your payment falls to approximately $2,345. You save $115 monthly. A fixed-rate mortgage at 3.79% keeps you paying $2,535 monthly no matter what.
Trigger rates and payment adjustments
For variable-rate mortgages with fixed payments, there’s a concept called a trigger rate. This happens when rising interest rates cause your fixed payment to no longer cover the interest portion of your mortgage.
At that point, your lender will typically require you to increase your payment.
Examples with simple calculations
Consider a $400,000 mortgage with a 25-year amortization. At a variable rate of 3.45%, your monthly payment would be approximately $1,970. At a fixed rate of 3.79%, your payment would be around $2,030. That’s a $60 monthly difference favoring the variable rate.
How to decide which mortgage type is best for you
Several personal factors determine which mortgage rate is better for your unique situation.
Financial stability and budget comfort
Assess your monthly cash flow. Do you have room in your budget to absorb a potential payment increase of $100 to $200? If an unexpected rate hike would strain your finances, a fixed rate provides valuable protection. If you have a financial cushion, a variable rate becomes more viable.
Risk tolerance
Your emotional response to uncertainty matters. Some people lose sleep worrying about rate increases, even when they can afford them.
If stress about rising rates would affect your quality of life, a fixed rate delivers peace of mind. If you’re comfortable with uncertainty, a variable rate might suit your temperament.
Short-term vs long-term plans
How long do you plan to stay in your home or keep your mortgage? If you might move, refinance, or pay off your mortgage within a few years, a variable rate’s lower breaking penalties make it attractive.
Economic trends and Bank of Canada forecasts
Pay attention to where rates are headed. The Bank of Canada has lowered its overnight rate to 2.25%. If rates are likely to rise, locking in a fixed rate now protects you. If rates might fall further, a variable rate lets you benefit.
Importance of prepayment flexibility
Both fixed and variable mortgages typically offer prepayment options, but the penalties for breaking differ significantly. If there’s any chance you’ll need to break your mortgage early, remember that variable mortgages charge only three months’ interest.
Common mistakes when choosing mortgage rates
Avoiding these errors helps you make a better decision about fixed vs variable rate mortgages.
Focusing only on the interest rate
The lowest rate isn’t always the best deal. A mortgage with a slightly higher rate but better prepayment privileges, lower penalties, or more flexible terms might save you money over time.
Ignoring penalties for breaking the mortgage
Many Canadians break their mortgages before their term ends. Failing to understand penalty calculations can cost you tens of thousands of dollars. Variable mortgages typically offer much lower penalties.
Not considering future plans
Your mortgage should align with your life plans. If you’re planning to have children, change jobs, or make other major life changes within your term, think about how those changes might affect your ability to handle variable rate fluctuations.
Misunderstanding variable rate mechanics
Many borrowers don’t fully understand how variable-rate mortgages work, particularly the difference between adjustable-rate mortgages and fixed-payment variable mortgages. Not knowing about trigger rates can lead to unpleasant surprises when rates rise.
FAQs about fixed vs variable rate mortgages
Fixed-rate mortgages are safer in terms of payment predictability and protection from rising rates. You know exactly what you'll pay each month. However, variable-rate mortgages aren't necessarily risky if you have the financial flexibility to handle payment changes.
Yes, most lenders allow you to convert from a variable to a fixed rate mortgage during your term. You typically get the lender's current fixed rate for the remaining portion of your term.
Fixed mortgage penalties are higher because lenders lock in their funding costs when they offer you a fixed rate. If you break your mortgage early, they lose expected profit. The interest rate differential calculation compensates them for that loss.
Historically, variable rates have saved borrowers money more often than not over long periods. However, this isn't guaranteed. During periods when rates rise significantly, fixed rates can be cheaper.
With a fixed-rate mortgage, nothing changes. Your rate and payment stay the same. With a variable-rate mortgage, your rate changes within days of a Bank of Canada announcement. If you have an adjustable-rate mortgage, your payment changes immediately.