A fixed-rate mortgage locks the interest rate for the entire term, providing predictable payments. A variable-rate mortgage tracks the lender’s prime rate, which moves with the Bank of Canada policy rate. Variable rates have historically been lower on average but expose the borrower to rate-rise risk. The right choice depends on rate spread at the time of contract, the borrower’s tolerance for payment uncertainty, and the expected direction of rates over the term.
Key differences
| Feature | Fixed-rate mortgage | Variable-rate mortgage |
|---|---|---|
| Interest rate | Locked for entire term | Floats with prime, expressed as “prime – X%” or “prime + X%” |
| Payment amount | Static for the term | Static (variable-payment) or fluctuating (adjustable-payment) depending on lender |
| Compounding | Semi-annually under Interest Act | Typically monthly |
| Prepayment penalty | Greater of three months interest or IRD | Three months’ interest only |
| Conversion to fixed | n/a | Most variables can convert to fixed mid-term at the lender’s then-current fixed rates (no penalty for the conversion itself) |
| Stress test rate | max(contract + 2%, 5.25%) | max(contract + 2%, 5.25%) — same rule |
Variable-payment vs adjustable-payment variable
“Variable-payment” variable mortgages keep the monthly payment static, but the principal-versus-interest split adjusts as prime moves. If prime rises significantly, the static payment may no longer cover the interest, triggering a “trigger rate” or “trigger point” notification from the lender. The borrower then must increase the payment, make a lump sum, or convert to a fixed rate.
“Adjustable-payment” variable mortgages adjust the payment amount each time prime changes (typically with the next billing cycle). The principal payoff schedule stays roughly on track but cash flow varies.
Historical performance
Over the 25-year period from 2000 to 2025, variable-rate mortgages saved Canadian borrowers money on average compared to fixed. The advantage was largest during multi-year periods of stable or falling rates and smallest during rapid rate-hike cycles such as 2022 to 2023. Past performance does not predict future outcomes; the decision should be based on current rate spread and personal circumstances.
The discount rule of thumb
Canadian variable rates are typically expressed as “prime minus X%”. The discount X is set at origination and stays constant through the term. The contract rate moves up and down with prime but the discount does not. A 0.50% discount when prime is 7.20% gives a contract rate of 6.70%. If prime drops to 5.00%, the contract rate becomes 4.50%.
A common decision rule: if the variable discount is at least 0.50% to 1.00% below the equivalent fixed rate at origination, variable is the more aggressive value play. If the discount is small or the variable rate is roughly equal to fixed, the fixed-rate certainty is usually preferred.
Worked example: rate scenarios
$500,000 mortgage, 25-year amortization, 5-year term. Choosing between 5.00% fixed or prime – 0.50% (effective 5.45% if prime is 5.95%).
| Scenario over 5 years | Fixed total interest | Variable total interest | Better choice |
|---|---|---|---|
| Prime stays at 5.95% | $117,000 | $127,000 | Fixed (saves $10,000) |
| Prime drops to 4.95% | $117,000 | $104,000 | Variable (saves $13,000) |
| Prime drops to 3.95% | $117,000 | $83,000 | Variable (saves $34,000) |
| Prime rises to 6.95% | $117,000 | $152,000 | Fixed (saves $35,000) |
Conversion option
Most variable-rate mortgages allow conversion to a fixed rate during the term. The conversion is at the lender’s current fixed rates (not the rate at origination), and typically requires the new fixed term to be at least as long as the time remaining on the original variable term. There is no separate conversion penalty.
This option lets a borrower start with variable savings and lock in if rates rise sharply. The trade-off: the conversion fixed rate is the rate at the time of conversion, which is typically higher than fixed rates were at origination.
Stress test treatment
Both fixed and variable mortgages are stress-tested at max(contract rate + 2%, 5.25%). The stress test does not change the contract rate; it determines maximum loan size at qualification.
How to decide
- Choose fixed if: rate certainty matters more than potential savings, the variable discount is small (under 0.50%), the budget cannot absorb meaningful payment increases, or the term is short (1 to 2 years where a single rate move could erase variable advantage).
- Choose variable if: the discount is meaningful (0.75% or more), the borrower can absorb payment increases or has cash buffer, the term is long (5+ years where average rate is more important than starting rate), or rates are at a peak and expected to fall.
- Choose hybrid if available: some lenders offer 50/50 fixed-variable splits that smooth the decision.
Frequently asked questions
- Is fixed or variable better in Canada?
- Variable has historically saved money on average over 25-year periods but with higher risk. The right choice depends on the discount at origination, term length, and the borrower's tolerance for payment uncertainty.
- How does a variable mortgage rate work?
- Variable rates are expressed as prime - X% (or +X%). The discount stays constant through the term; the contract rate moves up and down as the lender's prime rate changes.
- Can I convert a variable mortgage to fixed?
- Yes, most variable mortgages allow mid-term conversion at the lender's current fixed rates. The new fixed term must usually equal or exceed the remaining variable term. No separate conversion penalty applies.
- What is a trigger rate?
- On variable-payment mortgages with static monthly payments, the trigger rate is the rate at which the static payment no longer covers the interest. Reaching it requires the borrower to increase payment, make a lump sum, or convert to fixed.
- How does prepayment penalty differ?
- Variable penalties are three months' interest. Fixed penalties are the greater of three months' interest or IRD, which can be much larger especially at major banks using posted-rate IRD.
- Does the stress test treat them differently?
- No. Both are stress-tested at max(contract rate + 2%, 5.25%). The qualifying rate is the same regardless of fixed or variable.
- What is the typical variable discount?
- Variable rates are commonly priced at prime - 0.40% to prime - 1.10% depending on lender, market conditions, and borrower profile. Larger discounts make the variable choice more attractive.