Mortgages are commonly structured in one of two ways: fixed-rate and variable-rate (with some variable-rate products, such as adjustable-rate mortgages, structured a little differently). The key difference is predictability: fixed rates remain unchanged during the term, while variable rates can move with market conditions. In this article, we'll explain how each type works, compare the key differences, and help you think through which option might suit your financial situation.
What is a fixed-rate mortgage?
A fixed-rate mortgage locks in your interest rate for the entire term, meaning your monthly payment stays exactly the same. For example, if a bank quotes you 5% for 5 years on a $400,000 loan (amortised over 25 years), you'd pay about $2,300 every month until the term ends. Fixed term mortgage rates are closely linked to Government of Canada bond yields — when bond yields rise or fall, fixed mortgage rates typically follow.
What is a variable-rate mortgage?
A variable-rate mortgage has an interest rate that changes regularly — as often as every month — based on the Bank of Canada's overnight rate. While your term length is fixed, your rate isn't.
Many variable-rate mortgages are structured like this:
Fixed monthly payment: You typically pay the same amount each month (for example, $2,300), while the split between principal and interest changes as rates change.
If rates fall: More of your payment goes toward principal, which can help you pay down the loan faster.
If rates rise: More of your payment goes toward interest. If rates rise enough, you may reach your trigger rate—the point where your payment no longer covers the interest and your lender may require a payment increase.
There's also a type of variable-rate mortgage called an adjustable-rate mortgage (ARM), where your monthly payment rises or falls at set intervals. ARMs often start with lower rates, but that can change if rates rise.
Fixed vs. variable mortgage rates compared
In practice, the trade-off is stable payments versus the potential for rate changes during your term. Here's how they stack up:
Fixed-rate mortgage | Variable-rate mortgage | |
|---|---|---|
| Interest rate | Locked in for the entire term | Changes monthly with the overnight rate |
| Monthly payment | Always the same | Usually fixed, but interest/principal split changes (can rise if you hit trigger rate) |
| Budgeting | Predictable and stable | Less certain; requires flexibility |
| Upfront cost | Typically higher initial rate | Often lower initial rate |
| Penalties to break | Usually much higher due to interest rate differential | Typically lower (often 3 months' interest) |
How to choose between fixed and variable
Choosing the right mortgage type depends on your financial situation, your risk tolerance, and your long-term plans. Consider these factors:
Budget stability: If you have a strict monthly budget and want to avoid payment uncertainty, a fixed rate may feel more manageable.
Cash flow flexibility: If you have room in your budget and want the possibility of lower interest costs, a variable rate may be an option to consider.
Timeline: If you might move or refinance before your term ends, variable mortgages often have lower break penalties, which can reduce costs in some cases.
How fixed and variable rates move in Canada
It helps to understand what drives these rates behind the scenes:
Fixed rates: Tied to Government of Canada bond yields. When bond yields rise (often due to inflation expectations or economic growth), fixed mortgage rates typically follow. This means fixed rates can move independently of the Bank of Canada's policy rate.
Variable rates: Directly linked to the Bank of Canada's overnight rate. When the central bank raises or lowers its benchmark, lenders adjust their prime rates immediately, which impacts your variable mortgage rate.
What to know before you lock in or renew
Before making a final decision, take time to stress-test your budget. Calculate what your monthly payment would look like if interest rates rose by a few percentage points — could you still comfortably cover your housing costs?
If you're coming up for mortgage renewal, also ask your lender these key questions:
Prepayment privileges: Can you make extra payments without penalty?
Penalty calculations: What would it cost to break your mortgage early?
Payment adjustments: Exactly how will your payments change if rates move?
Trigger rate: At what rate would your payment need to increase?
The bottom line on fixed vs. variable mortgages
For those able to accept the inherent risk of a variable rate mortgage, there is a possibility of saving money in the long term by paying more on the principle and less on interest. Those who need financial consistency will find themselves more comfortable with a fixed-rate mortgage.
Frequently asked questions about fixed vs. variable mortgages
Is it better to have a variable or fixed mortgage?
It depends on your budget and risk tolerance. Fixed is often more suitable for those who need predictable payments, while variable can work for those with flexible budgets or who want to be able to control penalty costs in the event they may need to break their mortgage early.
What happens if my variable mortgage hits the trigger rate?
If you reach your trigger rate, your lender may require a higher payment, a lump-sum payment, or a change to a different mortgage type (such as a fixed rate), depending on your contract.
