The short version: what fixed and variable actually mean
A fixed-rate mortgage locks your interest rate and regular payment for the entire term — typically 1 to 5 years in Canada. Your payment does not change even if market rates move. This is the most popular choice in Canada, accounting for roughly 66% of new mortgages originated in recent years according to CMHC data.
A variable-rate mortgage has a rate that fluctuates with your lender's prime rate, which generally follows the Bank of Canada's policy interest rate. When the Bank of Canada raises or lowers rates, your variable rate moves. Some variable mortgages keep the payment amount fixed while the interest-to-principal split shifts internally; others adjust the payment immediately with each rate change.
The core trade-off is certainty versus potential savings. Fixed gives you a predictable budget. Variable gives you exposure to falling rates — and historically, to lower average costs over time.
Fixed gives you a straight, predictable path. Variable moves with the market — sometimes in your favour, sometimes not.
What moves fixed rates vs what moves variable rates
Understanding what drives each rate type helps you assess where each might be headed — without needing to be an economist.
Fixed mortgage rates are priced off Government of Canada bond yields, not the Bank of Canada policy rate. When bond markets expect inflation or stronger economic growth, yields rise, and fixed rates follow — sometimes before the Bank of Canada even acts. The 5-year Government of Canada bond yield is the most-watched benchmark for 5-year fixed mortgage pricing.
Variable rates are tied directly to the lender's prime rate, which moves with the Bank of Canada's overnight rate. When the Bank of Canada adjusts its policy rate — typically at one of eight scheduled announcement dates per year — variable-rate borrowers see the impact within days or weeks, depending on their lender.
This distinction means fixed and variable rates can move in opposite directions simultaneously. In early 2024, for example, some lenders cut fixed rates while the Bank of Canada held its policy rate steady, because bond markets were pricing in future rate cuts before they materialized.
| Rate type | Primary driver | Secondary influences | Typical reset frequency |
|---|---|---|---|
| Fixed (5-year) | 5-year Government of Canada bond yield | Inflation expectations, global bond markets, lender competition | Daily — lenders reprice as bond yields move |
| Variable (5-year) | Bank of Canada overnight rate via lender prime rate | Lender prime rate spread, Bank of Canada forward guidance | 8 scheduled BoC dates per year, plus any emergency moves |
| Fixed (3-year) | 3-year Government of Canada bond yield | Same as 5-year, with shorter duration sensitivity | Daily |
| Variable (open) | Prime rate | Typically priced at a premium over closed variable | With each BoC decision |
Bond yields reflect market expectations — they often move ahead of actual Bank of Canada decisions. This is why fixed rates can drop while variable rates stay put, or vice versa.
Head-to-head comparison: fixed vs variable
This table captures the practical differences that matter day to day, not just the theory. Use it to identify which factors matter most for your situation.
| Factor | Fixed-rate mortgage | Variable-rate mortgage | Edge |
|---|---|---|---|
| Payment predictability | Fixed for the full term — payment never changes | Payment may change with each BoC rate move (or amortization shifts internally) | Fixed ✓ |
| Historical average cost | Higher average rate over full cycles — you pay for the insurance of certainty | Lower average rate over time — Bank of Canada research suggests variable beats fixed ~70% of the time | Variable ✓ |
| Break penalty | IRD formula — can be 3–5% of the mortgage balance, potentially thousands per $100K borrowed | Three months' interest — typically 0.5%–1% of balance, much more predictable | Variable ✓ |
| Protection from rising rates | Full protection for the term — rate is locked | No protection — payment rises when prime rises (unless you have a fixed-payment variable) | Fixed ✓ |
| Benefit from falling rates | None while locked — must break and refinance to access lower rates (penalty applies) | Automatic — payment or amortization benefit flows through within weeks | Variable ✓ |
| Rate at origination (typical spread) | Typically 0.20%–0.50% higher than variable at origination in normal markets | Usually priced at a discount to fixed at the start of a term | Variable ✓ (at start) |
| Convertibility | Fixed stays fixed — no conversion option needed | Many variable mortgages allow conversion to fixed without refinancing — check your contract | Variable ✓ (with convertibility clause) |
| Best for | Tight budgets, rising-rate environments, short-term owners who can't absorb payment shocks | Flexible budgets, long-term holders, rate-cut cycles, borrowers who may break early | Depends ✓ |
The IRD (Interest Rate Differential) penalty on fixed mortgages can vary dramatically between lenders. Some use posted rates (much higher), others use discounted contract rates. Always ask which formula your lender uses before locking in a fixed rate.
The penalty story: why breaking a fixed mortgage costs more
If there's one factor that consistently catches borrowers off guard, it's the penalty difference between fixed and variable mortgages. This matters even if you don't plan to break — because plans change: job relocation, growing family, separation, or an opportunity to buy a better home.
Variable-rate mortgage penalties are straightforward: three months' interest calculated on your outstanding balance at your current rate. On a $400,000 mortgage at 5.70%, that's roughly $5,700 — predictable and usually manageable.
Fixed-rate mortgage penalties use the Interest Rate Differential (IRD) formula. The lender compares your contract rate to the current market rate for a term matching your remaining time. If your rate is higher than today's rate, you pay the difference times the remaining term — which can be substantial. On the same $400,000 mortgage, a 2% rate differential with 3 years remaining could mean a penalty exceeding $24,000.
The IRD formula itself varies by lender. Some use posted rates (inflating the penalty), others use discounted contract rates. This single difference can double or halve your penalty. Always ask your lender which formula they use — before you sign, not when you need to break.
- Variable penalty: 3 months' interest — roughly $5,700 on a $400K balance at 5.70%.
- Fixed penalty (IRD): can reach $24,000+ on the same balance depending on rate spread and remaining term.
- Some lenders use posted-rate IRD (higher penalty); others use contract-rate IRD (lower). Ask before signing.
- Prepayment privileges can offset penalties: many contracts allow 15–20% annual lump sums without penalty.
Breaking a fixed mortgage can cost 3–5× more than breaking a variable. The penalty formula matters more than the rate.
Historical performance: how often does variable beat fixed?
Looking backward doesn't guarantee forward results, but it provides the best available evidence for a decision that affects your largest monthly expense.
Research by the Bank of Canada and independent analysts consistently finds that variable-rate mortgages have delivered lower total interest costs than fixed-rate mortgages over most multi-year holding periods in Canada. Estimates suggest variable beat fixed in roughly 70% of 5-year holding periods since 2000 — meaning about 7 out of every 10 borrowers who held a variable mortgage for a full 5-year term paid less total interest than if they had locked in a fixed rate at the same starting point.
The exceptions cluster around periods when the Bank of Canada raised rates unexpectedly fast — most notably the 2022–2023 tightening cycle, where the policy rate rose from 0.25% to 5.00% in under 18 months. Borrowers who took variable mortgages in late 2021 saw their payments rise sharply. Those who locked in a 5-year fixed rate in 2020–2021 at sub-2% rates came out well ahead.
The lesson is not 'variable always wins' — it's that variable wins on average over full cycles, but the ride can be uncomfortable during tightening phases. Your personal cash flow margin determines whether you can tolerate the uncomfortable parts.
| Holding period | Variable beat fixed | Fixed beat variable | Key context |
|---|---|---|---|
| 2000–2004 | Yes | — | Falling rate environment — variable outperformed |
| 2005–2009 | Yes | — | Rates declined through financial crisis — variable won |
| 2010–2014 | Yes | — | Stable low-rate period — variable had slight edge |
| 2015–2019 | Mixed | Mixed | Two BoC hikes and cuts — outcome depended on entry timing |
| 2020–2024 | — | Yes | Aggressive rate hikes — fixed locked in 2020–21 won decisively |
| 2025–2029 (projected) | TBD | TBD | If rate cuts continue as markets expect, variable may regain advantage |
Past performance does not predict future results. The table reflects broad trends — your specific outcome depends on your contract rate, lender, and exact entry and exit dates. Source: Bank of Canada historical data 2000–2024.
When fixed makes sense
Fixed-rate mortgages are not the 'safe' default — they are the right choice when payment certainty outweighs the probability of paying less interest over time. Here is when fixed tends to be the stronger move:
- Your monthly budget has limited margin — a $200 payment increase would cause stress.
- You expect to hold the mortgage for most or all of the term — the penalty risk is lower.
- Market rates are historically low, and the premium for fixed over variable is small (under 0.30%).
- You are buying your first home and want one less variable to track during an already complex process.
- You value simplicity — set it, automate it, and focus on other financial goals.
When variable makes sense
Variable mortgages reward borrowers who can absorb rate volatility in exchange for lower expected total cost. Here is when variable tends to be the stronger move:
- Your cash flow has margin — you could handle a 1–2% rate increase without cutting essentials.
- You expect to break the mortgage before maturity — lower penalties reduce exit risk.
- You are in a rate-cutting cycle — Bank of Canada is actively lowering or expected to lower rates.
- You have a convertible variable mortgage that lets you lock into fixed later if conditions change.
- You plan to sell within 2–3 years — the shorter your effective holding period, the more penalty risk matters.
- You have other assets or income sources that provide a buffer against payment increases.
The right choice depends on your timeline, budget margin, and what keeps you sleeping well at night.
A decision framework: how to choose for your actual situation
Ignore what the market is doing for a moment. The best mortgage choice starts with your own numbers and timeline. Walk through these questions in order:
- Question 1 — What is your realistic holding period? If you are likely to sell, refinance, or move within 2–3 years, variable's lower penalty gives you flexibility. If you plan to stay put for 5+ years, the penalty gap narrows in relevance.
- Question 2 — What is your cash flow margin? Calculate your monthly payment under both fixed and variable scenarios. Then stress it: what happens if variable rises 1.5%? Can you still cover essentials and savings? If yes, variable is a viable option. If no, fixed buys you certainty.
- Question 3 — What is the rate spread right now? When the fixed-variable spread is narrow (under 0.30%), fixed offers certainty at little cost. When the spread is wide (0.50%+), variable's cost advantage is harder to ignore — if you can stomach the volatility.
- Question 4 — Does your variable mortgage include a conversion option? Many variable mortgages allow you to lock into a fixed rate later without refinancing or penalties. This gives you an escape hatch if rates rise — but the fixed rate offered at conversion may not be the best market rate, so compare before converting.
- Question 5 — What lets you sleep? This matters more than any optimization. If variable-rate news keeps you up at night, the interest savings are not worth the anxiety. The best mortgage is the one you can hold through the cycle without panic-selling or panic-breaking.
The convertible variable: a middle path worth considering
Some lenders offer convertible variable-rate mortgages — a structure that starts as variable but gives you the right to lock into a fixed rate at any point during the term without breaking your mortgage. This is not the same as refinancing, and it avoids the standard penalty.
The trade-off: the conversion rate is usually the lender's posted fixed rate at the time of conversion, not necessarily the best discounted rate available in the market. You are trading rate flexibility for penalty avoidance. Whether this is a good deal depends on how competitive that lender's posted rates are and whether you would otherwise break and shop the full market.
For borrowers who lean variable but want insurance against a rapid rate-hike cycle, a convertible variable can be a pragmatic compromise. Just confirm the conversion terms — rate methodology, timing, and any fees — in writing before you commit.
Frequently asked questions
Is variable always cheaper than fixed?
Not always, but historically it has been cheaper about 70% of the time over 5-year holding periods in Canada since 2000. The exceptions occur during rapid rate-hiking cycles like 2022–2023, where fixed-rate borrowers who locked in early came out ahead. The spread at origination and the path of rates during your term both affect the outcome.
How much higher are fixed-rate penalties compared to variable?
Variable penalties are typically three months' interest — about $5,700 on a $400,000 balance at 5.70%. Fixed-rate penalties use the IRD formula and can reach $20,000–$35,000 on the same balance, depending on the rate spread, remaining term, and which IRD formula your lender uses. Always ask your lender which IRD formula they apply before signing.
Can I switch from variable to fixed without penalties?
Yes, if your mortgage contract includes a conversion option. Many variable mortgages allow you to lock into a fixed rate with the same lender at any time without breaking the mortgage. The conversion rate is usually the lender's posted rate at that time, not necessarily the best market rate. Compare before converting. If your mortgage does not have a conversion clause, switching requires breaking the mortgage — though variable penalties are relatively low.
What is a trigger rate and does it apply to fixed mortgages?
A trigger rate only applies to variable-rate mortgages with fixed payments. It is the rate at which your payment no longer covers the interest — at which point the lender typically requires you to increase payments, make a lump sum, or convert to fixed. Fixed-rate mortgages do not have trigger rates because the rate is locked for the full term.
Should I choose fixed if rates are expected to fall?
Not necessarily. If rates are expected to fall, variable lets you benefit from those declines automatically. Fixed locks you into today's rate. However, if the fixed rate being offered today is already low by historical standards and the fixed-variable spread is narrow, locking in the certainty may be worth forgoing the potential savings from future cuts. There is no guaranteed right answer — it depends on your budget margin and timeline.
Is a shorter fixed term (1–3 years) a compromise between fixed and variable?
It can be. A shorter fixed term gives you more frequent opportunities to reprice while still providing payment certainty during the term. The trade-off is that shorter terms often carry slightly higher rates than 5-year fixed, and you face renewal risk more often. For borrowers who want the predictability of fixed but expect rates to be lower in a couple of years, a 2- or 3-year fixed term is a common middle ground.
Does the mortgage type affect my ability to make extra payments?
Prepayment privileges — the ability to make lump-sum payments or increase your regular payment — are generally independent of whether your mortgage is fixed or variable. They are set by the lender and the specific product. Most Canadian mortgages allow annual prepayments of 15–20% of the original balance without penalty. Confirm this before signing, especially if you plan to accelerate your payoff.
Turn this guide into your mortgage plan
Compare fixed and variable rates on your actual numbers, or book a 45-minute consult with a Pragmatic Mortgage broker who can model both scenarios with real lender rates.
