Choosing between a fixed vs variable mortgage is one of the first big decisions for Canadian homebuyers or owners renewing their mortgage. This guide compares the two mortgage types, explains how each works in Canada, and gives practical steps to decide which mortgage type is likely the best fit for your situation.
How fixed and variable mortgages work
Fixed-rate mortgage — the basics
What it is: The interest rate is set for the term (commonly 1–10 years). Your regular payment and interest portion are predictable for that term.
How lenders price it: Fixed rates follow long-term bond yields and lenders' funding costs.
Common uses: Buyers who want payment stability, retirees, or anyone planning a fixed budget.
Variable-rate mortgage — the basics
What it is: The interest rate moves with your lender's prime rate (which changes with the Bank of Canada policy rate). Your rate may rise or fall during the term.
How lenders price it: Often offered as "prime minus" or "prime plus" a spread.
Common uses: Buyers who can tolerate rate volatility or expect rates to fall or stay stable.
Quick comparison (checklist)
Predictability: Fixed = high; Variable = low.
Potential savings when rates fall: Variable > Fixed.
Protection if rates spike: Fixed > Variable.
Typical penalty for breaking: Fixed = Interest Rate Differential (IRD) or three months' interest; Variable = usually three months' interest (verify with lender).
Best for: Fixed — risk-averse or budget-focused borrowers; Variable — rate-sensitive borrowers with tolerance for swings.
Key factors to consider before choosing
Your risk tolerance
If you need rock-solid monthly payments, favour fixed.
If you can absorb payment swings or pay more during rate increases, variable may be acceptable.
Your time horizon
Short-term ownership (selling in a couple years): consider which product gives lower penalties and better short-term cashflow.
Long-term ownership: think about long-run interest cost and likelihood of rate cycles.
Market outlook (rate expectations)
Variable mortgages track prime — if you expect the Bank of Canada to cut rates or stay stable, variable could save money.
If you expect rates to rise, fixed protects you from increases.
Monthly cashflow and buffer
Build a buffer (rainy-day fund) if choosing variable so you can handle payment increases without stress.
Prepayment options and portability
Check annual prepayment privileges (lump sums, increased payments).
Look at portability (moving mortgage to a new property) and assumability.
Qualification & stress test
You must pass the federal mortgage stress test. Lenders use a qualifying rate (often the Bank of Canada mortgage qualifying rate or your contract rate + 2%—check with your lender).
Use the [FCAC mortgage calculator] to estimate payments and stress-test outcomes.
High-ratio mortgages and insurance
If your down payment is less than 20%, CMHC or other mortgage loan insurance may apply. See [CMHC mortgage default insurance basics] for details.
Example: how small rate differences add up
These are illustrative examples — use a calculator for exact figures.
Purchase price: $500,000, down payment: 20%, mortgage: $400,000, amortization: 25 years.
Fixed rate example: 4.00% → approximate monthly payment: $2,115.
Variable rate example: 3.00% → approximate monthly payment: $1,898.
Difference: about $217/month, or roughly $2,600/year. Over time, changing rates can widen or narrow this gap.
Note: These numbers are approximate; use an exact mortgage payment calculator or the [FCAC mortgage calculator] to run your scenario.
When a fixed-rate mortgage makes sense
You rely on steady monthly payments (tight budget, fixed income).
You want to lock in today's rate and avoid future rate increases.
You plan to keep the mortgage for the full term and prefer certainty.
You have low tolerance for interest rate risk and don't want to monitor rate movements.
When a variable-rate mortgage makes sense
You can tolerate payment swings and have an emergency fund.
You believe rates will fall or remain stable during your term.
You want the potential for lower initial payments and interest cost.
You plan to pay the mortgage off faster or refinance if rates change.
Practical step-by-step to choose the best mortgage type
Run numbers
Use an online calculator (e.g., [FCAC mortgage calculator]) to compare payments at different rates and amortizations.
Stress-test your budget
Increase the variable example payment by 1–2 percentage points (or by a fixed monthly amount) to see if you can still pay comfortably.
Compare lender offers
Get quotes for both fixed and variable options, noting prepayment privileges and penalties.
Ask about penalties & portability
Confirm the exact penalty calculation for breaking the mortgage and whether the mortgage is portable or assumable.
Decide and document
Choose the product that fits your comfort level and long-term plan. Keep written notes on what you negotiated (rate hold, perks, prepayment options).
Penalties, switching, and renewals — what to expect
Breaking a mortgage: Fixed mortgages commonly use the Interest Rate Differential (IRD) or three months' interest — whichever is greater. Variable mortgages usually charge three months' interest. Always confirm with your lender.
Switching or refinancing: Steps typically include 1) getting a payout figure, 2) checking prepayment/penalty costs, 3) applying for a new mortgage if refinancing, and 4) completing the legal discharge/registering a new charge.
Renewal: Lenders will offer a renewal rate before term end; negotiate with your current lender and shop rates.
Questions to ask your mortgage broker or lender (checklist)
What is the exact penalty for breaking the mortgage?
What prepayment privileges do I have (annual lump sum, increase payment %)?
Is the mortgage portable or assumable?
Do you offer a fixed-rate hold before closing?
Are there early renewal or conversion options?
Which qualifying rate do you use for approval/stress test?
Useful Canadian resources
Learn how policy rates affect prime and variable mortgages at the [Bank of Canada interest rate overview].
Use the [FCAC mortgage calculator] to compare scenarios and perform stress tests.
Get details on mortgage default insurance from the [Canada Mortgage and Housing Corporation (CMHC) mortgage insurance basics].
Final tip: No one answer fits all. If you're uncertain, speak with a licensed mortgage professional and run concrete scenarios based on your income, amortization, and tolerance for rate changes. Consider splitting your mortgage (part fixed, part variable) as a compromise if you want both stability and upside potential.