Fixed vs variable mortgage rates in Canada

How each rate type works, the real cost difference, and which one suits your situation.

Choosing between a fixed and variable mortgage rate is one of the biggest financial decisions Canadian home buyers face. Get it right and you could save tens of thousands of dollars over your mortgage term. Get it wrong and you could face payment shock or steep penalties. This guide breaks down exactly how each type works, what the real cost difference is, and which one makes sense depending on your situation.

How fixed mortgage rates work in Canada

A fixed rate mortgage locks in your interest rate for the entire term — typically 1, 2, 3, or 5 years. Your monthly payment stays exactly the same for the full term regardless of what happens to interest rates in the broader market.

Key characteristics of fixed rate mortgages:

• Your rate and payment never change during the term
• You know exactly what you will pay every month
• The most popular choice in Canada — roughly 70% of Canadian borrowers choose fixed
• Breaking a fixed mortgage early triggers an Interest Rate Differential (IRD) penalty which can be very expensive
• Rates are typically higher than variable rates to compensate for the certainty they provide

The 5-year fixed rate is by far the most common mortgage product in Canada. It aligns with the standard mortgage review cycle and is the rate the OSFI stress test is based on.

How variable mortgage rates work in Canada

A variable rate mortgage has an interest rate that moves up or down based on your lender's Prime rate, which follows the Bank of Canada's overnight rate. When the Bank of Canada raises or cuts rates, your variable mortgage rate changes accordingly.

There are two types of variable rate mortgages in Canada:

Variable rate, variable payment

Your monthly payment changes whenever Prime rate changes. If rates go up, your payment goes up. If rates go down, your payment goes down. This is the traditional variable rate mortgage.

Variable rate, fixed payment (adjustable rate)

Your monthly payment stays the same, but the portion going to interest versus principal changes. If rates rise significantly, more of your payment goes to interest and less to principal — in extreme cases your payment may not even cover the interest (called a trigger rate situation, which affected many Canadians in 2022-2023).

Key characteristics of variable rate mortgages:

• Rate fluctuates with Bank of Canada decisions (typically 8 times per year)
• Historically lower than fixed rates over long periods
• Breaking a variable mortgage early only triggers a 3-month interest penalty — much cheaper than fixed IRD penalties
• Requires higher risk tolerance and financial flexibility
• You benefit immediately when rates are cut

The historical case for variable rates

Over the past 30 years, Canadian borrowers who consistently chose variable rates paid less interest than those who consistently chose fixed rates. A widely cited study by Dr. Moshe Milevsky found that variable rate borrowers came out ahead approximately 88% of the time over any given 5-year period.

However — and this is critical — that historical advantage assumes the borrower could handle the payment volatility and did not break their mortgage early. The 2022-2023 rate hiking cycle was a painful reminder that variable rates can rise sharply and quickly. Many variable rate holders saw their payments increase by $500-$1,000 per month within 18 months.

The lesson: variable rates win on average, but fixed rates win on certainty.

Fixed vs variable — the real cost comparison

The difference between fixed and variable rates directly impacts your total interest cost. Here is a real example using a $500,000 mortgage with a 25-year amortization:

Want to see what these numbers look like for your actual income and target home price? Our affordability guide walks through the GDS and TDS rules that decide your maximum mortgage.

The penalty difference — why it matters more than the rate

One of the most overlooked factors in the fixed vs variable decision is the cost of breaking your mortgage early. In Canada, roughly 60% of mortgages are broken before the end of their term due to divorce, job relocation, home sale, or refinancing.

Breaking a fixed mortgage

The penalty is the greater of 3 months interest OR the Interest Rate Differential (IRD). The IRD can be enormous — on a $500,000 mortgage broken 2 years early, IRD penalties of $15,000-$25,000 are common at major banks. Some borrowers have faced penalties over $40,000.

Breaking a variable mortgage

The penalty is always just 3 months interest. On a $500,000 mortgage at 5%, that is approximately $6,250 — a fraction of the fixed penalty.

Real implication: If there is any chance you will move, sell, or refinance within your term, a variable rate mortgage can save you a significant amount in penalties alone — even if the rate itself is the same as fixed.

Which type is right for you?

There is no universally correct answer — it depends entirely on your financial situation, risk tolerance, and plans.

Choose fixed if:

• You are a first-time buyer stretching your budget to the maximum qualification limit
• You have a tight monthly cash flow with little room for payment increases
• You value predictability and would lose sleep over rate increases
• You are buying in a period of historically low rates that are likely to rise
• You plan to stay in the home for the full mortgage term with no likelihood of breaking early
• You are retired or on a fixed income

Choose variable if:

• You have financial flexibility to absorb payment increases of $300-$500 per month if rates rise
• You have a strong emergency fund of 3-6 months of expenses
• You believe the Bank of Canada will cut rates over your term (rates are near the top of their cycle)
• You may need to break your mortgage early — the lower penalty could save you significantly
• You are financially sophisticated and comfortable monitoring Bank of Canada decisions
• You have significant equity in the property

The hybrid option — split mortgage

Some Canadian lenders offer a split mortgage where you put a portion (e.g. 50%) in fixed and 50% in variable. This gives you some payment certainty while still benefiting if rates fall. It also reduces your blended penalty if you break early. Not all lenders offer this product.

What is happening with Canadian mortgage rates in 2025?

The Bank of Canada cut its overnight rate multiple times through 2024 and into 2025, bringing rates down from their 2023 peak. Variable rate holders benefited significantly from these cuts. As of early 2025, the spread between fixed and variable rates has narrowed, making the decision more balanced than it was at the peak of the rate cycle.

Key factors to watch:

• Bank of Canada rate decisions (announced 8 times per year)
• Canadian inflation data (CPI)
• Employment and GDP figures
• US Federal Reserve decisions, which influence Canadian rate expectations

Variable rates move in lockstep with Bank of Canada decisions. Fixed rates are influenced by Government of Canada bond yields, which move based on market expectations of future rates.

How to get the best rate in Canada regardless of type

Whether you choose fixed or variable, these steps will get you the lowest available rate:

• Use a mortgage broker: Brokers have access to rates from 30+ lenders and are paid by the lender, not you. They consistently beat bank-posted rates by 0.2%-0.5% which on a $500,000 mortgage saves $1,000-$2,500 per year.
• Get pre-approved before you shop: A rate hold locks in today's rate for 90-120 days while you house hunt. If rates rise, you keep the lower rate. If rates fall, most lenders will honour the lower rate at closing.
• Negotiate: Bank-posted rates are not final. Always ask for better. Saying "I have a competing offer from another lender" almost always results in a better rate.
• Consider the term length: Shorter terms (1-2 year fixed) can make sense when rates are high and expected to fall. You take the fixed certainty for a short period then renew at lower rates.

Calculate your exact payment for any property

Use Smart Mortgage Calculator to see exactly what your monthly payment would be at current fixed and variable rates for any property in Canada. Paste any Realtor.ca, Zolo, or MLS listing URL and get a full breakdown in seconds — including how the payment changes under different rate scenarios.

Frequently asked questions

Mortgage rates change daily. The examples in this article are for illustrative purposes only. Always confirm current rates with a licensed mortgage broker or your lender before making decisions.