Fixed vs Variable Mortgage Rates
Which option fits your financial profile?
Fixed and variable are the two main rate types in Canada. The right pick depends on your tolerance for payment changes and your view on future rates.
How fixed rates work
Your rate and payment are locked for the term (typically 1–10 years, with 5 years being most common). Predictable — but breaking the mortgage early can trigger an Interest Rate Differential (IRD) penalty that is sometimes large.
How variable rates work
Your rate moves with the lender's prime rate, which tracks the Bank of Canada overnight rate. Payments may stay flat (with more interest, less principal) or move with the rate, depending on the lender.
Penalties to break the mortgage
- Variable: usually 3 months' interest
- Fixed: greater of 3 months' interest or IRD — can be $10,000+ in some cases
A simple comparison example
On a $500,000 mortgage, a 0.5% difference is roughly $140/month. Over 5 years, that's about $8,400 — but a fixed-rate penalty on an early break can easily exceed that.
Who should pick which
- Fixed: you value certainty, plan to stay the full term, or are stretched on cash flow
- Variable: you can absorb payment increases, may sell/refinance early, and expect rates to fall or stay flat
Key takeaways
- Fixed = predictable payment, harder penalties
- Variable = lower historical average, more risk
- Always check the prepayment privileges and penalty formula
- Stress test still applies to both
Sources used
Disclaimer: This guide is for educational purposes only and does not constitute financial, mortgage, legal, or tax advice. Always verify details with qualified professionals and financial institutions.