Fixed vs Variable Mortgage in Canada

The Core Difference

A fixed-rate mortgage locks your interest rate for the entire term — typically 5 years. Your payment stays the same regardless of what happens to interest rates in the broader economy. A variable-rate mortgage (also called a floating rate) moves with the lender's prime rate, which in turn follows the Bank of Canada's overnight rate. When the Bank of Canada raises rates, your variable rate increases. When they cut rates, yours drops.

In Canada, variable-rate mortgages come in two forms: adjustable-rate mortgages (ARMs), where your payment amount changes when rates move, and variable-rate mortgages with fixed payments, where your payment stays the same but the proportion going to interest vs. principal shifts.

Fixed-Rate Mortgages: Pros and Cons

• Pro: Complete payment certainty — you know exactly what you'll pay for the full term
• Pro: Protection against rate increases during your term
• Pro: Easier budgeting, especially for first-time buyers
• Con: If rates fall, you're locked in at the higher rate
• Con: Breaking a fixed mortgage early typically involves significant penalties — often the greater of 3 months' interest or the Interest Rate Differential (IRD)
• Con: Historically, fixed rates have been higher than variable rates over long time horizons

Variable-Rate Mortgages: Pros and Cons

• Pro: Historically lower over long periods — studies show most Canadians save money with variable rates over the full amortization
• Pro: When rates fall (as they did in 2020 and again in 2024–2025), you benefit immediately
• Pro: Lower break penalty — typically just 3 months' interest, with no IRD calculation
• Con: Payment uncertainty can cause financial stress for some borrowers
• Con: If rates rise significantly (as they did 2022–2023), your costs increase
• Con: Requires more financial resilience and discipline

What the Data Shows

A widely cited study by York University professor Moshe Milevsky found that Canadian borrowers would have paid less interest with a variable rate in roughly 90% of 5-year periods between 1950 and 2000. More recent analyses have produced similar findings. The 2022–2023 rate cycle was a notable exception — borrowers who chose variable in 2021 saw their rates increase dramatically. However, the Bank of Canada began cutting rates in 2024, and variable-rate holders began to see relief.

The historical advantage of variable rates comes with a caveat: it requires the financial cushion to absorb payment increases and the discipline not to break the mortgage when rates rise.

The Canadian Context: Rate History

Canada's mortgage market has its own distinct dynamics. The Bank of Canada sets the overnight rate, which influences prime rate at major lenders (typically prime = overnight rate + 2.2%). Fixed mortgage rates are influenced more by Government of Canada bond yields. This means fixed and variable rates don't always move in sync — it's possible for fixed rates to rise while variable rates stay flat, or vice versa.

Which Should You Choose in 2025?

As of 2025, the Bank of Canada has been cutting its overnight rate after the aggressive hiking cycle of 2022–2023. Variable rates have become more competitive relative to fixed rates. Key considerations:

• If you need payment certainty and would be financially stressed by payment increases, a fixed rate is likely better for you regardless of where rates go
• If you have financial flexibility, a longer amortization remaining, and can tolerate payment variation, a variable rate may save you money as rates continue to normalize
• Your plans matter: if you might sell or refinance within 5 years, a variable rate's lower break penalty could save thousands
• Consult a licensed mortgage broker who can model both scenarios for your specific situation

Hybrid Mortgages

Some lenders offer hybrid mortgages — part fixed, part variable — allowing you to split your mortgage between both rate types. This reduces risk on both sides but adds complexity. These products are less common and not offered by all lenders.