Compare Fixed vs Variable Mortgage
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Choosing between a fixed vs variable mortgage is one of the most important decisions Canadian homebuyers face. Your choice affects your monthly payments, total interest costs, and financial flexibility over the life of your loan.
This guide breaks down both options with current data, historical context, and practical scenarios to help you decide which mortgage type aligns with your financial situation and risk tolerance.
Make confident financial decisions: Understand the real-world impact of fixed and variable mortgages on your budget and long-term wealth.
What Is a Fixed Mortgage?
A fixed-rate mortgage locks your interest rate for the entire term, typically one to ten years. Your rate stays the same regardless of what happens in the broader economy or with the Bank of Canada’s policy decisions.
In Canada, fixed rates are priced based on Government of Canada bond yields. Lenders add a spread to the bond yield that corresponds to your mortgage term. A 5-year fixed mortgage, for example, is priced off the 5-year Government of Canada bond.
Your monthly payment remains constant throughout the term. The split between principal and interest changes with each payment, but the total amount you pay stays the same.
How Fixed Rates Work
When you lock into a fixed rate, three elements are determined for your term: your interest rate, your monthly payment amount, and your prepayment penalty structure.
- Rate stability: Your rate will not change even if the Bank of Canada raises or lowers its overnight rate multiple times during your term.
- Payment certainty: Your mortgage payment stays the same, making budgeting straightforward and predictable.
- Protection from increases: If rates rise significantly during your term, you are shielded from higher costs.
- Penalty structure: Breaking your mortgage early typically triggers an Interest Rate Differential (IRD) calculation, which can be expensive.
What Is a Variable Mortgage?
A variable-rate mortgage has an interest rate that moves with the lender’s prime rate. Most Canadian lenders set their prime rate at the Bank of Canada’s overnight rate plus 2.20%.
As of October 2026, the Bank of Canada’s overnight rate is 2.25%, which means most lenders’ prime rates sit at 4.45%. Variable mortgages are priced as prime plus or minus a discount or premium.
When the Bank of Canada adjusts its rate, your lender’s prime rate changes within days, and your variable mortgage rate adjusts by the same amount.
Two Types of Variable Mortgages
Canadian lenders offer two structures for variable mortgages. Understanding the difference is critical because they affect your cash flow differently when rates change.
- Variable-Rate Mortgage (VRM): Your payment stays the same throughout the term. When rates change, the split between principal and interest adjusts. If rates rise, more of your payment goes to interest and less to principal. If rates fall, more goes to principal.
- Adjustable-Rate Mortgage (ARM): Your payment adjusts with every rate change. The principal portion remains fixed, but your total payment rises or falls based on interest rate movements.
Current Rates in Canada
As of March 27, 2026, the best 5-year fixed mortgage rate in Canada is 3.99% for high-ratio mortgages. The best 5-year variable rate is 3.35%. Rates and terms may vary by financial institution.
The spread between fixed and variable is currently 64 basis points. That is narrower than historical averages, which typically range from 50 to 150 basis points depending on the yield curve environment.
| Term | Best Fixed Rate | Best Variable Rate | Spread |
|---|---|---|---|
| 3-year | 4.20% | 3.60% | 0.60% |
| 5-year | 3.99% | 3.35% | 0.64% |
| Average 5-year | 4.74% | 4.22% | 0.52% |
The Bank of Canada has held its overnight rate at 2.25% since October 2025. Market forecasts are divided: some expect one more cut to 2.00% by mid-2026, while others predict rate hikes in the second half of the year if inflation pressures return.
Pros and Cons of Fixed Mortgages
Fixed-rate mortgages offer certainty at the cost of flexibility. They work best when you prioritize stable payments over potential savings or when you expect rates to rise during your term.
Benefits of Fixed Rates
- Payment stability: Your payment never changes during the term, making household budgeting straightforward and predictable.
- Rate protection: If interest rates rise significantly, you are fully protected from higher costs for the duration of your term.
- Psychological comfort: Many borrowers sleep better knowing their rate is locked in, especially first-time homebuyers or those with tight budgets.
- Simplicity: You do not need to monitor Bank of Canada decisions or economic indicators. Your rate is set and you are done.
Drawbacks of Fixed Rates
- Higher starting rate: Fixed rates are typically priced higher than variable rates at the outset, meaning you pay more in the early years if rates do not rise.
- Expensive penalties: If you need to break your mortgage early, the Interest Rate Differential (IRD) penalty can be substantial, sometimes reaching tens of thousands of dollars.
- Opportunity cost: If rates fall during your term, you miss out on lower payments unless you pay the penalty to refinance.
- Less flexibility: Fixed mortgages lock you in, which can be costly if your life circumstances change and you need to sell or refinance.
Pros and Cons of Variable Mortgages
Variable-rate mortgages offer potential savings and flexibility at the cost of uncertainty. They work best when you can absorb payment fluctuations and expect rates to remain stable or decline.
Benefits of Variable Rates
- Lower starting rate: Variable rates typically start 50 to 100 basis points below fixed rates, delivering immediate savings on your monthly payment.
- Lower penalties: Breaking a variable mortgage costs three months of interest, which is far less expensive than the IRD penalty on a fixed mortgage.
- Historical advantage: Research shows that over 90% of Canadians who held a variable rate for their entire mortgage term paid less total interest than those who chose fixed.
- Conversion option: Most variable mortgages allow you to convert to a fixed rate at any time without penalty, giving you a safety valve if rates start rising.
Drawbacks of Variable Rates
- Payment uncertainty: With an ARM, your payment can rise significantly if the Bank of Canada raises rates multiple times during your term.
- Budgeting complexity: You need to monitor interest rate trends and maintain a buffer in your budget to handle potential payment increases.
- Trigger risk: With a VRM, if rates rise enough, your payment may no longer cover the interest, forcing you to increase payments or pay down principal.
- Market timing stress: Variable rate holders often feel pressure to convert to fixed at the right moment, which requires monitoring economic conditions.
Penalty Costs Matter
Nearly 60% of Canadians break their mortgage before the end of their term. Whether you sell your home, refinance to access equity, or restructure debt, the penalty you pay can vary dramatically based on your mortgage type.
For fixed-rate mortgages, lenders charge the greater of three months of interest or the Interest Rate Differential (IRD). The IRD penalty can be substantial, especially if rates have fallen since you locked in your mortgage.
For variable-rate mortgages, the penalty is typically three months of interest. This is far more predictable and usually much lower than the IRD on a fixed mortgage.
| Scenario | Fixed Penalty (IRD) | Variable Penalty (3 mo) |
|---|---|---|
| $500,000 mortgage at 4.5% | $15,000 – $25,000 | $5,600 |
| $750,000 mortgage at 4.0% | $22,000 – $35,000 | $7,500 |
| $1,000,000 mortgage at 3.5% | $30,000 – $45,000 | $8,750 |
If there is any chance you might sell, refinance, or restructure within your mortgage term, the penalty difference is a critical factor in your decision. Rates and terms may vary by financial institution.
If You Might Sell Before Your Term Ends
If a sale is likely before your term ends, the penalty can matter more than the rate gap. Your lender usually charges the higher of 3 months' interest or the interest rate differential (IRD), and it usually uses the IRD when your rate is higher than current rates and you signed less than 5 years ago. According to the Financial Consumer Agency of Canada (FCAC), as of September 2026, three mortgage features can reduce or avoid that cost:
- Portable mortgage: if you sell to buy another home, you transfer your balance, interest rate, and terms to the new property. If the new home needs less than your current balance, you may still pay a penalty.
- Open mortgage: you can pay it off at any time without a penalty, in exchange for a higher rate than a closed mortgage. FCAC lists it as an option if you plan to sell soon.
- Assumable mortgage: your buyer takes over your mortgage, with the lender's approval. This option is typically available on fixed-rate mortgages, not on variable-rate mortgages.
Before you sign, ask your lender whether the mortgage is portable and exactly how it calculates the penalty. A federally regulated lender, such as a bank, must show its prepayment penalties in the information box at the start of your mortgage agreement. For the details, see the FCAC guide to mortgage prepayment penalties.
Who Should Choose Fixed?
Fixed-rate mortgages work best for borrowers who prioritize certainty over potential savings. If any of the following describes your situation, a fixed mortgage may be the right choice.
- Tight budget: You need predictable payments and cannot absorb a $200 to $500 monthly increase if rates rise.
- First-time buyer: You are new to homeownership and prefer the simplicity and stability of a fixed payment.
- Long hold period: You plan to stay in the home for the full term and do not anticipate selling or refinancing early.
- Rising rate expectation: You believe the Bank of Canada will raise rates during your term and want protection from higher costs.
- Low risk tolerance: You value peace of mind over potential savings and prefer to avoid monitoring economic conditions.
Who Should Choose Variable?
Variable-rate mortgages work best for borrowers who have financial flexibility and can tolerate short-term uncertainty in exchange for potential long-term savings.
- Financial cushion: You can absorb a 1% to 2% rate increase without significant stress on your household budget.
- Shorter hold period: You may sell or refinance within two to four years and want to minimize prepayment penalties.
- Stable or declining rate view: You believe the Bank of Canada will hold rates steady or cut further during your term.
- Aggressive paydown plan: You intend to make lump-sum payments or pay off your mortgage early and want the flexibility of lower penalties.
- Active monitoring: You are comfortable tracking Bank of Canada decisions and converting to fixed if conditions change.
The 3-Year Fixed Alternative
A three-year fixed mortgage can split the difference between the certainty of a five-year fixed and the flexibility of a variable rate. The three-year fixed rate is currently around 4.20%, which sits between the best variable and five-year fixed rates.
This option gives you payment stability for three years while reducing your long-term rate exposure. When your term ends in 2029, you will have a clearer picture of where rates are headed and can renew into variable or fixed based on updated conditions.
Three-year fixed terms work well if you expect rate volatility in the short term but anticipate more clarity within a few years. They also work if you may sell or refinance within that window, as your prepayment penalty exposure is shorter.
Bottom Line
The fixed vs variable mortgage decision depends on your financial situation, risk tolerance, and expectations about future interest rate movements. Fixed rates offer stability and predictability at a higher cost. Variable rates offer potential savings and flexibility but require you to accept uncertainty.
As of March 2026, variable rates are lower than fixed rates, but the spread is narrow and the Bank of Canada has paused rate cuts. If you need payment certainty and cannot absorb increases, fixed is the safer choice. If you have financial flexibility and believe rates will stay flat or decline, variable may deliver better long-term value.
Consider your hold period, penalty tolerance, and cash flow capacity before making your decision. Compare current offers and calculate scenarios where rates rise or fall to see how each option affects your total interest cost. For more guidance on mortgages and financial planning, explore our resources or subscribe to our newsletter for regular updates.
Fixed vs Variable Mortgage – FAQ
What is the difference between a fixed and variable mortgage in Canada?
A fixed-rate mortgage locks your interest rate for the entire term, typically one to ten years. Your payment stays the same regardless of Bank of Canada rate changes. A variable-rate mortgage has a rate that moves with the lender’s prime rate, which is tied to the Bank of Canada’s overnight rate. Variable rates can rise or fall during your term.
Which mortgage type has lower rates right now in Canada?
As of March 2026, variable rates are lower than fixed rates. The best 5-year variable rate is around 3.35% while the best 5-year fixed rate is approximately 3.99%. This represents a spread of about 64 basis points. Rates and terms may vary by financial institution.
Can I switch from a variable to a fixed mortgage?
Yes, most variable-rate mortgages in Canada allow you to convert to a fixed rate at any time without penalty, as long as you stay with the same lender. The fixed rate offered at conversion will be the lender’s current posted rate, not the rate available when you first signed your mortgage.
What happens if I break my mortgage early?
If you break a fixed-rate mortgage, you pay the greater of three months of interest or the Interest Rate Differential (IRD), which can be substantial. If you break a variable-rate mortgage, you typically pay three months of interest only, which is usually far less expensive and more predictable.
Have variable mortgages historically been cheaper than fixed mortgages?
Yes, research by York University Professor Moshe Milevsky found that over 90% of Canadians who held a variable-rate mortgage for their entire term paid less total interest than those who chose fixed rates. However, this advantage depends on holding the mortgage through rate cycles and having the financial capacity to absorb rate increases.
What is the difference between a VRM and an ARM?
A Variable-Rate Mortgage (VRM) has a fixed payment, and when rates change, the split between principal and interest adjusts. An Adjustable-Rate Mortgage (ARM) has a variable payment that rises or falls with rate changes, while the principal portion stays fixed. Both are tied to the lender’s prime rate.
Is a variable rate better if I might sell my home?
It can be, because breaking a variable-rate mortgage typically costs 3 months of interest, while breaking a fixed-rate mortgage can trigger the interest rate differential (IRD). However, a portable fixed-rate mortgage lets you move your rate and terms to your next home without breaking the contract, and an open mortgage avoids the penalty in exchange for a higher rate. Ask your lender how each option applies to your contract before you sign.
Should you accept your lender's early renewal offer?
Not necessarily. According to the Financial Consumer Agency of Canada (FCAC), as of October 2026, you don't have to renew with the same lender. You can also negotiate a rate lower than the one in your renewal letter by showing offers from other lenders or a mortgage broker. Start comparing mortgage rates a few months before your term ends. If the offer extends your mortgage before the term ends, the FCAC calls it a blend-and-extend option: you don't pay a prepayment penalty, but administrative fees may apply. Your lender then blends your old rate with the new term's rate, and it must tell you how it calculates the new rate.
What should your mortgage renewal statement include?
If your lender is a federally regulated financial institution, such as a bank, it must give you a renewal statement at least 21 days before the end of your term, according to the FCAC as of October 2026. The statement shows your remaining balance at the renewal date, the interest rate, the payment frequency, the term, and any charges or fees that apply. It must also state that the offered rate won't increase before your renewal date. In addition, if you don't take action, your mortgage may renew automatically, and the statement will say so. Read it as soon as it arrives so you still have time to compare offers from other lenders.
How do you compare a variable-rate and a fixed-rate offer at renewal?
Start by calculating the gap between the two rates. A variable rate follows your lender's prime rate: as of October 2026, RBC's prime rate is 4.45%, and the Bank of Canada's policy rate has been 2.25% since October 29, 2025. For example, a 3.95% variable rate (prime minus 0.50%) against a 4.94% fixed rate leaves a gap of 0.99 percentage points. The variable rate stays cheaper as long as its average over the term remains below the fixed rate, which means prime would have to rise by about 1 point on average over the term. Then check your own threshold: calculate your payment at a higher rate and make sure your budget can absorb it before choosing variable.
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