Fixed vs. Variable Rate Mortgages in 2026: Which Should You Choose?

Fixed or variable? It is the most common question we hear. The answer depends on your financial situation, risk tolerance, and where you think rates are heading. Let us walk through both options.

How Fixed Rates Work

A fixed-rate mortgage locks your interest rate for the entire term (typically 1-5 years). Your payment stays exactly the same every month, regardless of what the Bank of Canada does.

Pros:

• Predictable payments — easier to budget
• Protected from rate increases during your term
• Peace of mind in uncertain economic times

Cons:

• Usually starts higher than the variable rate
• Higher prepayment penalty if you break the mortgage early (IRD calculation vs. 3-month interest)
• You miss out if rates drop significantly during your term

How Variable Rates Work

A variable-rate mortgage tracks the lender's prime rate, which moves with the Bank of Canada overnight rate. When the BoC raises rates, your rate goes up. When they cut, your rate goes down.

There are two types:

1. Variable rate, adjustable payment (VRM): Your payment changes when the rate changes.
2. Variable rate, fixed payment: Your payment stays the same, but the interest/principal split changes. If rates rise significantly, you could hit your "trigger rate" where your payment no longer covers the interest.

Pros:

• Usually starts lower than the fixed rate (the "variable discount")
• Lower penalty to break (typically 3-month interest, not IRD)
• Benefits from any rate cuts during your term

Cons:

• Payment uncertainty (or trigger rate risk with fixed-payment variable)
• Can increase significantly if the BoC raises rates
• Requires higher risk tolerance

The Historical Perspective

Historically, choosing variable has saved money more often than choosing fixed. Studies looking at decades of Canadian mortgage data show that variable-rate borrowers paid less than fixed-rate borrowers approximately 80-90% of the time.

However, past performance does not guarantee future results. The 2022-2023 rate hike cycle reminded many borrowers that variable rates can increase quickly and significantly.

Decision Framework for 2026

Ask yourself these questions:

Choose Fixed If:

• You are a first-time buyer on a tight budget with no room for payment increases
• You sleep better knowing your payment will not change
• You plan to stay in your home for the full 5-year term
• Your GDS/TDS ratios are already close to the limit

Choose Variable If:

• You have financial flexibility to absorb a 1-2% rate increase
• You expect the Bank of Canada to maintain or lower rates
• You might sell or refinance within 2-3 years (lower penalty)
• You want to take advantage of the initial rate discount

Consider a Shorter Fixed Term If:

• You are unsure, and a 2 or 3-year fixed term gives you a decision point sooner
• You expect rates to drop but want stability in the near term
• You are in a transition period (job change, growing family, potential move)

The Hybrid Approach

Some borrowers split their mortgage: 50% fixed and 50% variable. This gives partial protection and partial flexibility. Not all lenders offer this, but it is worth exploring if you are truly torn.

What About the Stress Test?

Both fixed and variable mortgages must qualify at the stress test rate — the higher of your contracted rate + 2% or the Bank of Canada qualifying rate. This means you are already approved to handle some rate increase, even with a variable mortgage.

Our Recommendation Process

We never give blanket advice to "go fixed" or "go variable." Instead, we:

1. Review your complete financial picture
2. Discuss your risk tolerance and plans
3. Model different rate scenarios
4. Explain the penalty implications of each
5. Let you make an informed decision

The best mortgage is the one that lets you sleep at night while still being financially efficient.

Discuss your options with us →