A fixed-rate mortgage locks your interest rate and payment for the term, while a variable-rate mortgage moves with your lender's prime rate and the Bank of Canada. Neither is automatically better — the choice depends on how much payment uncertainty your budget can absorb.
A fixed-rate mortgage locks your interest rate — and usually your payment — for the full term, so you know exactly what you owe each month. A variable-rate mortgage ties your rate to your lender's prime rate, which moves when the Bank of Canada changes its policy interest rate, so your cost can rise or fall. Neither option is automatically better: the choice comes down to how much payment uncertainty you can absorb, how long you plan to keep the mortgage, and how the exit penalty would affect you if your plans change.
| Feature | Fixed rate | Variable rate |
|---|---|---|
| Interest rate | Set when you sign and unchanged for the term | Tied to the lender's prime rate; moves when prime moves |
| Monthly payment | Same amount every month | May change, or stay level with a shifting interest-and-principal split |
| Certainty | High — you can budget to the dollar | Lower — payment or amortization can shift |
| Starting rate | Often higher than a discounted variable rate at the same lender | Often lower at the start, but not guaranteed to stay lower |
| Cost to break early | Commonly three months' interest or an interest rate differential, whichever is greater | Commonly three months' interest |
| Often suits | Tight budgets, fixed income, longer stays | Flexible budgets, larger emergency fund, shorter horizon |
How a fixed-rate mortgage works
With a fixed rate, the lender guarantees the same interest rate for the entire term. Terms are commonly one to five years, and some lenders offer longer ones. Your payment is calculated so the loan is repaid over the amortization period, which is usually 25 years, though longer amortizations are available for some buyers.
Because both the rate and the payment are locked, a fixed mortgage is the easiest product to budget around. The trade-off is that you give up the chance to benefit if rates fall during your term. If prime drops and new borrowers are paying less, your payment does not change — you keep the rate you agreed to until the term ends.
Most fixed mortgages come with prepayment privileges. Many lenders let you pay down a set percentage of the original principal each year, or increase your regular payment, without a penalty. Those privileges vary widely between lenders and are worth comparing alongside the rate itself.
How a variable-rate mortgage works
A variable rate is quoted as a discount or premium relative to the lender's prime rate — for example, prime minus a negotiated amount. Prime itself moves when the Bank of Canada adjusts its policy interest rate, and lenders typically pass changes through quickly. The Bank of Canada publishes its policy interest rate along with the dates of its announcements, so you can see when your rate is likely to move.
Variable products come in two forms. With an adjustable-rate mortgage, your payment changes when prime changes. With a fixed-payment variable mortgage, your payment stays level, but the split between interest and principal shifts. Both are variable-rate mortgages; they simply pass the interest-rate risk to your budget in different ways.
Variable rates usually start lower than a comparable fixed rate at the same lender, which is why they are often marketed as the cheaper option. That advantage holds only while prime stays flat or falls. If prime rises above your starting point, the discount can shrink and eventually disappear.
Why some variable payments stay the same
With a fixed-payment variable mortgage, the lender recalculates less often. When prime rises, more of each payment goes toward interest and less toward principal, so the loan is paid down more slowly than originally scheduled. Over a long stretch of increases, the amortization can stretch well beyond what you signed up for. Most lenders set a trigger point where the payment must be increased, or the mortgage re-amortized, to keep the loan on schedule.
This is the part many borrowers miss. A steady payment feels like certainty, but with a variable rate the certainty is about cash flow, not total cost. Your balance can fall more slowly, and more of your money can go to interest over the term. If you want a variable rate but need predictability, ask the lender directly how it handles increases, how often the payment is recalculated, and what triggers a payment change. Get the answers in writing before you sign.
The rate-risk trade-off
Choosing fixed means paying for certainty. You accept a rate that may end up higher than the average variable rate over the same period, in exchange for never being surprised by a payment increase. Choosing variable means accepting the possibility of higher payments in exchange for a lower starting rate and the chance to pay less if rates fall.
Neither choice is a prediction about the future. It is a decision about which risk you would rather carry. A useful way to test yourself: take your expected variable payment and work out what it would be if prime rose by one, two, or three percentage points. If those numbers would strain your budget, a fixed rate or a shorter term is likely easier to live with. You can model the numbers with our loan payment calculator.
Qualification rules matter here too. Federally regulated lenders apply a mortgage stress test, which means you must qualify at a rate higher than the contract rate. Provincially regulated credit unions may follow different rules. The Office of the Superintendent of Financial Institutions sets the federal guideline, and the Financial Consumer Agency of Canada explains how mortgage shopping, disclosure and your rights work.
Who each option tends to suit
A fixed rate tends to suit buyers who value predictability: first-time buyers with a lean emergency fund, households on a single or fixed income, buyers who plan to stay in the home for the full term, and anyone who would find a higher payment genuinely difficult to manage in the same month as other bills.
A variable rate tends to suit borrowers with room in their budget — an emergency fund that could cover several months of higher payments — who plan to sell or refinance before the term ends, or who intend to use aggressive prepayment privileges. It also suits buyers who would rather avoid a large interest rate differential penalty if they need to break the mortgage early.
Many Canadians split the difference with a hybrid mortgage, placing part of the balance in a fixed rate and part in a variable rate. Others pick a short fixed term to get certainty for a year or two without committing for five. Both approaches are common, and lenders price them differently, so compare full offers rather than headline rates.
If a family member is co-signing your mortgage to help you qualify, the rate choice still applies — and the co-signer carries the same risk. Our guide to what a co-signer is explains how that obligation works, and if your credit history is thin or damaged, see our page on bad credit loans in Canada for how lenders assess applications.
Common mistakes to avoid
- Assuming a steady payment means a fixed rate. A fixed-payment variable mortgage keeps the payment level while the interest and principal split changes underneath it.
- Choosing variable without a cushion. If a two- or three-point increase would break your budget, the starting discount is not worth the risk.
- Comparing only the rate. Term length, prepayment privileges, portability, penalty formula and conversion options all affect your total cost.
- Ignoring the penalty before you sign. If there is any chance you will sell or refinance mid-term, the gap between three months' interest and an interest rate differential can be significant.
- Forgetting requalification at renewal. Switching lenders can mean passing the stress test again under current rules; a lower rate is not useful if you no longer qualify.
- Letting the mortgage auto-renew. Renewal is usually the easiest moment to renegotiate or switch without paying a penalty.
- Skipping a credit check before applying. Errors on your file can affect approval and pricing — see the FCAC's guidance on credit reports and credit scores.