Question 1

Should I choose fixed or variable for my mortgage renewal in Canada?

Accepted Answer

There is no universally correct answer — it depends on your financial situation and risk tolerance. Variable rates have historically been cheaper about 70% of the time over long periods in Canada, primarily because lenders price in a risk premium to fixed rates. However, during the 2020–2023 rapid rate-hike cycle, variable-rate holders saw large payment increases. The right choice comes down to two questions: (1) Can you absorb a $300–$500/month payment increase if rates rise 2%? (2) Is there any chance you will need to break your mortgage before the term ends? If the answer to either is "no," fixed may be the lower-stress choice regardless of rate forecasts.

Question 2

What is the break penalty for a fixed vs variable mortgage in Canada?

Accepted Answer

Variable-rate mortgages in Canada have a simple break penalty: three months of simple interest on your remaining balance. On a $500,000 mortgage at 3.5%, that is roughly $4,375. Fixed-rate mortgages use the Interest Rate Differential (IRD) or three months' interest — whichever is greater. The IRD can be $10,000–$30,000 or more when rates have fallen since you signed, because it compensates the lender for the income they lose when you break early. This is one of the strongest practical arguments for choosing variable if there is any chance you might sell, move, or refinance before your term ends.

Question 3

How is the IRD penalty calculated on a fixed mortgage in Canada?

Accepted Answer

The Interest Rate Differential (IRD) is generally calculated as: (your contracted rate − lender's current rate for your remaining term) × remaining balance × remaining term in years. For example, if you have 3 years left at 5.5% and the current 3-year rate is 4.0%, the IRD on a $400,000 balance would be roughly $18,000. The exact formula varies by lender — many use their posted (undiscounted) rates rather than discounted rates, which makes the penalty larger. Always get the exact dollar amount from your lender before breaking your mortgage. This calculator shows an estimate using the simplified formula above.

Question 4

What happens to my variable-rate mortgage if the Bank of Canada raises rates?

Accepted Answer

When the Bank of Canada raises its overnight rate, chartered banks raise their prime rate by the same amount, usually within a day or two. Your variable mortgage rate moves with prime: if you are at prime minus 0.75% and prime rises from 4.45% to 4.95%, your rate goes from 3.70% to 4.20%. Depending on your mortgage type, either your monthly payment increases immediately (adjustable-rate mortgage) or the interest portion of each payment grows while the payment stays the same (variable-rate mortgage). In the latter case, if rates rise enough, you can hit your trigger rate — the point where your payment no longer covers the interest. Use the rate scenario table above to see how much your total interest increases at each rate level.

Question 5

What is a trigger rate on a variable mortgage in Canada?

Accepted Answer

The trigger rate is the interest rate at which your fixed monthly payment on a variable-rate mortgage no longer covers the interest owed, meaning your principal balance actually grows instead of shrinking. This became a real problem for many Canadians in 2022–2023 when the Bank of Canada raised rates rapidly. If you hit your trigger rate, your lender will contact you and typically require you to increase your payment, make a lump-sum payment, or convert to a fixed rate. Adjustable-rate mortgages (ARMs) don't have a trigger rate problem because the payment automatically adjusts with each rate change.

Question 6

Can I switch from a variable to a fixed rate during my term in Canada?

Accepted Answer

Yes. Most variable-rate mortgages in Canada include a conversion option that lets you lock into a fixed rate at any point during your term, usually without paying a penalty. However, you receive the lender's current posted rate, which may be higher than their best advertised rate. Shop around and negotiate before converting — call your lender and at least one competing lender or broker first. Converting when rates are rising is a common strategy, but by the time rates have already risen significantly, the available fixed rate will reflect that. Ideally, you convert before a rate cycle peaks, not after.

Question 7

Is a 3-year fixed term a good compromise between fixed and variable in Canada?

Accepted Answer

A shorter fixed term — 2 or 3 years — is a common middle ground. You get payment certainty for the term, but you return to market sooner, which gives you flexibility if rates fall. In a period where rates are expected to decline, a 2–3 year fixed can outperform both a 5-year fixed (you avoid being locked into a higher rate) and variable (you avoid short-term uncertainty). The trade-off is that shorter fixed terms sometimes carry higher rates than longer ones, and you face renewal risk sooner. Use this calculator to compare total interest under different term lengths and rate scenarios to see which approach makes sense for your situation.

Question 8

Does choosing fixed vs variable affect the stress test in Canada?

Accepted Answer

Yes. The Canadian stress test requires you to qualify at the greater of your contract rate plus 2%, or 5.25%. Since fixed rates are typically higher than variable rates, a fixed-rate mortgage at 4.5% means you qualify at 6.5%, while a variable at 3.5% means you qualify at 5.5%. This means a variable-rate mortgage often lets you qualify for a larger mortgage because the qualifying rate is lower. However, most lenders still stress test variable-rate applicants conservatively, so the practical difference in buying power varies. If you are near your maximum purchase limit, a variable rate may allow you to qualify for more.

BoC change	Var. rate	Var. payment/mo	Interest vs fixed
-1.5%	1.80%	$2,485	−$64,600 cheaper
-1.0%	2.30%	$2,632	−$50,485 cheaper
-0.5%	2.80%	$2,783	−$36,246 cheaper
No change(today)	3.30%	$2,940	−$21,892 cheaper
+0.5%	3.80%	$3,101	−$7,431 cheaper
+1.0%	4.30%	$3,267	+$7,130 more
+2.0%	5.30%	$3,613	+$36,518 more

Fixed vs Variable Rate Mortgage Calculator

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