Fixed vs. Variable Rate Mortgages: How to Choose

Fixed or variable is the question we hear most. The right answer depends on your budget, how much payment change you can handle, and how long you expect to keep the mortgage. Here is how each works, what the numbers can look like, and how to think it through.

How Fixed Rates Work

A fixed-rate mortgage locks your interest rate for the whole term. Terms most often run 1 to 5 years, and some lenders offer longer. Your payment stays the same every month, whatever the Bank of Canada does.

Pros:

Predictable payments, which makes budgeting easier
Protected from rate increases during your term

Cons:

Often starts higher than the variable rate, though that gap has reversed in the past, so check current rates
Usually a higher penalty if you break the mortgage early, because lenders may use the interest rate differential (IRD) instead of three months of interest
You do not benefit if rates fall during your term

How Variable Rates Work

A variable-rate mortgage is based on the lender's prime rate. Each lender sets its own prime, and it generally moves with the Bank of Canada's overnight rate. When prime goes up, your rate goes up. When it comes down, your rate comes down.

There are two types:

Adjustable payment: Your payment changes when the rate changes.
Fixed payment: Your payment stays the same, but the split between interest and principal changes. If rates rise enough, you can reach a "trigger rate" where your payment no longer covers the interest. At that point the lender may ask for a higher payment or other changes, so ask how your lender handles it.

Pros:

Often starts lower than the fixed rate
The penalty to break is usually lower, often three months of interest. Check your contract, since some variable contracts also use the IRD.
Your rate falls if prime falls

Cons:

Your payment, or your trigger rate cushion, can change during the term
Payments can rise a lot if the Bank of Canada raises its rate. Between March 2022 and July 2023 it went from 0.25% to 5.00%.

What a Rate Change Could Do to Your Payment

This is a hypothetical example to show scale, not a rate quote or a forecast. It assumes a $500,000 mortgage, a 25-year amortization and semi-annual compounding, which is how Canadian fixed mortgages are calculated.

Rate	Monthly payment	Change from 4.00%
4.00%	$2,630.10
5.00%	$2,908.02	+$277.92
6.00%	$3,199.03	+$568.93

So a rise of one percentage point adds roughly $280 a month in this example, and two points adds roughly $570. If that would strain your budget, a fixed rate or a shorter fixed term may suit you better.

Choosing Between Them

Questions worth asking yourself:

Fixed may suit you if:

Your budget is tight and a higher payment would be hard to absorb
A steady payment matters more to you than a possible lower rate
You plan to keep the mortgage for the full term
Your debt-service ratios (the share of your income that goes to housing costs and to all debts) are already near lender limits. CMHC uses 39% and 44% for insured mortgages.

Variable may suit you if:

You could absorb a payment increase like the ones in the example above without trouble
You might sell or refinance before the term ends, and a lower penalty matters to you
You are comfortable with your payment or rate changing

A shorter fixed term may suit you if:

You are unsure, and a 2 or 3 year term gives you a decision point sooner
You are in a transition period, such as a job change, a growing family or a possible move

Nobody knows where rates are heading, including us. A view on rates is a guess, so we would not build the decision on one.

The Hybrid Approach

Some borrowers split their mortgage between a fixed portion and a variable portion. This gives partial protection and partial flexibility. Not all lenders offer it, so ask if you are torn.

What About the Stress Test?

Most new mortgages must qualify at a higher "stress test" rate: the greater of your contract rate plus 2 percentage points, or 5.25%. This applies to fixed and variable alike. Uninsured mortgages moving to a new federally regulated lender at renewal, with no increase to the balance or amortization, are not expected to be stress tested.

The test checks that you qualify at a higher rate. It does not mean a larger payment will feel comfortable, so look at the example above with your own budget in mind.

How We Can Help

As mortgage agents, we can look at your full financial picture, talk through your risk tolerance and plans, and compare the options and the penalty terms that come with each. The decision stays yours. A good choice is one you can afford if rates move against you.

For more on related topics, see our mortgage renewal checklist and our first-time buyer guide for Barrie.

Book a call to compare fixed and variable for your numbers

Sources

Rules checked 2026-10-28.