Variable vs Fixed Mortgage Rates: Which Fits You?

What each rate type actually is

A fixed rate is locked for the duration of your term — typically three or five years. Your rate, payment, and principal/interest split stay the same every month regardless of what happens in the broader market. The certainty is the product.

A variable rate is expressed as a discount (or occasionally a premium) against the lender's prime rate. When the Bank of Canada changes its policy rate and lenders adjust prime, your rate moves with it. The rate you pay today is not the rate you will pay next quarter or next year.

How a variable rate moves

Your variable rate is tied to the lender's prime rate, which tracks the Bank of Canada's overnight rate. When the overnight rate rises, prime typically rises by the same amount, and your mortgage rate follows. The same holds in reverse — when rates fall, your rate drops.

There is an important distinction in how this affects your payments. Some variable-rate mortgages have an adjustable payment — when your rate changes, your payment amount changes with it. Others have a fixed payment — the payment stays the same, but the split between principal and interest shifts. When rates rise on a fixed-payment variable, more of each payment goes to interest and less to principal.

Trigger rates and why they matter

On a fixed-payment variable mortgage, if rates rise far enough, your entire monthly payment may no longer cover the interest owing. The point at which this happens is called your trigger rate. Beyond it, your mortgage balance starts growing instead of shrinking — a situation called negative amortisation.

Lenders handle this differently. Some require you to increase your payment. Others convert you to a fixed rate or require a lump-sum payment. The specific terms are in your mortgage contract, and they are worth reading before you sign — not after a rate announcement makes them relevant.

The penalty difference

If you break your mortgage mid-term — to sell, refinance, or switch lenders — you pay a prepayment penalty. The method for calculating that penalty is fundamentally different between the two rate types.

For a variable-rate mortgage, the penalty is typically three months' interest on your outstanding balance. Straightforward and relatively modest.

For a fixed-rate mortgage, the penalty is the greater of three months' interest or the interest rate differential (IRD). The IRD compares your contract rate against what the lender can currently lend for the remaining term. When rates have dropped since you signed, the IRD can be substantially larger than three months' interest — sometimes tens of thousands of dollars on a typical mortgage balance.

The term interacts with the choice

The longer your term, the more locked in you are. A five-year fixed means five years where you cannot move, refinance, or take advantage of a lower rate without paying that IRD penalty. A three-year term reduces that exposure.

Variable-rate borrowers are less affected by term length because their penalty is always three months' interest. But a shorter term still means you are renewing sooner — which gives you a chance to renegotiate. When your term ends, you can renew with your current lender or switch to a new one with no penalty at all.

Who each suits

This is not a question with a single correct answer. It depends on two things: your tolerance for payment variability, and how long you expect to hold this mortgage at this property.

• If you are on a tight budget where a payment increase of even a few hundred dollars per month would cause stress, a fixed rate removes that uncertainty for the full term.
• If you might sell or refinance within two to three years — a job change, a growing family, a planned move — the lower penalty on a variable rate reduces your exit cost substantially.
• If you have cash flow margin and can absorb rate movement, a variable rate has historically cost less over time — though past performance says nothing about your specific term.

A broker can model both scenarios against your actual numbers. The payment calculator lets you test different rates yourself to see how the monthly figure moves.