Fixed vs Variable Mortgage Rate
in Canada: Which Is Better?

Fixed or variable — it's one of the most consequential decisions you'll make when getting a Canadian mortgage, and there's no universally right answer. The choice depends on your risk tolerance, your cash flow, how long you plan to stay in the home, and where you think rates are heading. This guide walks through how each type works, what history tells us, and how to decide which is right for you.

Fixed vs variable: the key differences

How each rate type actually works

Fixed-rate mortgages

Fixed rates are set by lenders based on Government of Canada bond yields — specifically the 5-year bond. When bond yields rise (which happens when investors expect inflation or rate hikes), fixed mortgage rates follow. When bond yields fall, fixed rates fall. Your rate is locked the moment you sign, so you're unaffected by what happens to rates during your term.

The most popular term in Canada is the 5-year fixed, though 1, 2, 3, 4, and 10-year terms also exist. Shorter terms can be useful if you expect rates to drop and want to renew at a lower rate sooner.

Variable-rate mortgages

Variable rates move with the Bank of Canada's overnight rate, which is set 8 times per year. Most variable mortgages are priced as prime minus a discount — for example, "prime − 0.70%." If the prime rate is 5.45%, your variable rate would be 4.75%.

There are two types of variable mortgages in Canada: adjustable-rate (your payment changes when prime moves) and variable with fixed payment (your payment stays constant but the split between principal and interest shifts). The 2022–2023 rate hike cycle exposed the risks of fixed-payment variables, where some borrowers found themselves paying only interest — no principal.

The penalty difference: often the deciding factor

This is where fixed vs. variable really diverges in practice. Most Canadians break their mortgage before the end of their term — whether for a move, refinance, or life change.

• Variable penalty: Typically just 3 months of interest. On a $500,000 mortgage at 5%, that's roughly $6,250
• Fixed penalty: The greater of 3 months interest or the Interest Rate Differential (IRD). IRD penalties can be $15,000–$40,000+ if rates have dropped since you signed

Many Canadians who locked into fixed rates during 2020–2021 (at rates near 2%) faced enormous IRD penalties when they needed to break their mortgage. This is one of the strongest practical arguments for variable in periods of low rates.

Historical performance: what the data shows

Looking back over decades of Canadian mortgage data, variable-rate borrowers have paid less interest more often than not — most analyses suggest roughly 70–80% of the time, variable outperformed fixed over a full 5-year term. The reason: the Bank of Canada prime rate has trended downward since the early 1990s.

However, the 2022–2023 rate hike cycle — the most aggressive in Canadian history — was a stark reminder that variable rates can and do spike dramatically. Borrowers who chose variable in 2020–2021 saw their rates rise by 4–5 percentage points in roughly 18 months, adding hundreds of dollars per month to their payments.

The 2026 rate environment: what to consider

After the Bank of Canada raised rates aggressively through 2022–2023 and held them elevated into 2024, the cutting cycle that began in mid-2024 has brought prime rates meaningfully lower heading into 2026. In this environment:

• The spread between fixed and variable rates has narrowed — making fixed relatively more competitive than in high-rate periods
• Variable rate holders who weathered the hike cycle have benefited from the cuts
• The outlook for further cuts depends on inflation and economic growth — uncertainty that makes the fixed/variable decision genuinely difficult

When the fixed/variable spread is small (under 0.5%), fixed often makes sense since you're not sacrificing much for certainty. When the spread is large (1%+), variable offers meaningful savings if rates stay flat or fall.

Who should choose fixed?

• You're stretching to afford the home and a payment increase would be a serious problem
• You value predictability and sleep better knowing exactly what you owe
• You're unlikely to move or refinance before the term ends
• Rates have recently fallen and you want to lock in before they potentially rise
• The spread between fixed and variable is small (under 0.5–0.75%)

Who should choose variable?

• You have a healthy buffer in your budget to absorb rate increases of 1–2%
• You may sell or refinance before the end of the term (lower break penalty)
• You believe rates are likely to fall or stay flat over your term
• The spread between fixed and variable is meaningful (0.75%+)
• You're comfortable monitoring rates and potentially locking in if they spike

The hybrid option: split mortgages

Some lenders offer split mortgages — part fixed, part variable. For example, 50% of your mortgage at a fixed rate and 50% variable. This hedges both ways: you get some payment predictability while still benefiting if rates fall. It's not widely promoted but is worth asking your lender or broker about.