Fixed vs Variable Rate Mortgage: Which Is Right for You?
The choice between a fixed and variable rate mortgage is one of the most consequential financial decisions a Canadian homebuyer makes. There is no universally right answer — but there is a right answer for your specific circumstances, risk tolerance, and rate outlook.
How each rate type works
A fixed-rate mortgage locks your interest rate for the entire term (typically 1–5 years). Your payment doesn't change regardless of what happens to the Bank of Canada's overnight rate or bond yields. Under the Interest Act (Canada), fixed rates compound semi-annually.
A variable-rate mortgage moves with your lender's prime rate, which tracks the Bank of Canada's policy rate. When the BoC cuts, your rate falls. When it hikes, your rate rises. Variable rates compound monthly.
The compounding difference
Because fixed rates compound semi-annually and variable rates compound monthly, an identical headline rate produces different effective interest costs. At 5.00%, a fixed mortgage has an effective annual rate of about 5.063%, while a variable has an effective annual rate of 5.116%. On a $600,000 mortgage, that's roughly $300/year in extra interest on the variable side — a small but real consideration.
Historical performance
Academic research has found that variable-rate mortgages outperformed fixed rates in about two thirds of Canadian five-year terms. Variable rate holders who stayed the course generally paid less total interest over their full amortization.
However, 2022–2023 was a stark reminder that this is not always the case. Borrowers who took variable mortgages in 2020–2021 at record-low rates saw their payments surge by $600–$1,000/month as the Bank of Canada raised rates by 475 basis points in 18 months.
When fixed makes sense
- You're at the upper limit of what you can afford and any payment increase would be unmanageable
- You have dependants, a single income, or unstable employment
- You plan to stay in the home for the full term without breaking the mortgage
- Rates are already at or near historical lows and the direction is likely up
When variable makes sense
- You have a financial cushion to absorb potential payment increases
- You may sell or break the mortgage within the term (variable penalties are typically just 3 months' interest)
- Rates are elevated and the direction is likely down
- You're comfortable with uncertainty in exchange for a lower starting rate
The penalty asymmetry
Perhaps the most overlooked factor: breaking a fixed-rate mortgage early triggers an Interest Rate Differential (IRD) penalty, which can easily run $15,000–$30,000+ on a $500,000 mortgage if rates have fallen since you signed. Variable penalties are capped at 3 months' interest — typically $3,000–$7,000. If there's any chance you'll move or refinance before your term ends, this asymmetry often tips the math toward variable.
Use our calculator to compare your monthly payment at a fixed rate versus a variable rate scenario.
