What is the difference between a fixed and variable mortgage?

A fixed mortgage has the same interest rate for the entire term (typically 1 to 5 years). A variable mortgage has a rate that changes when the lender's prime rate changes — which tracks the Bank of Canada's overnight rate. Fixed rates provide payment certainty; variable rates offer the possibility of lower costs if rates fall.

Are fixed or variable mortgage rates lower in Canada?

Historically, variable rates have been lower than fixed rates over the long run. However, this varies with the rate environment. In 2024-2025, variable rates were initially higher than fixed rates due to the Bank of Canada's elevated overnight rate. As the Bank cut rates in 2024-2025, variable rates fell and the gap narrowed. The comparison depends on current spreads and rate expectations.

What is the mortgage stress test?

All federally regulated lenders must qualify borrowers at the higher of: the contract rate plus 2%, or 5.25%. For a 4.89% fixed mortgage, the stress test rate is 6.89%. This ensures borrowers can afford payments if rates rise. Credit unions and private lenders may use different qualifying criteria.

What is the penalty for breaking a fixed mortgage early?

Fixed mortgage penalties are typically the greater of three months' interest or the Interest Rate Differential (IRD). The IRD is calculated based on the difference between your contract rate and the lender's current rate for a similar term. IRD penalties can reach $20,000-$50,000 or more when rates have fallen significantly since your mortgage was signed.

What is the penalty for breaking a variable mortgage early?

Variable mortgage penalties are almost always three months' interest on the outstanding balance. For a $500,000 mortgage at 5.20%, three months' interest equals approximately $6,500. This is generally much less than the IRD penalty on a comparable fixed mortgage.

What is a trigger rate on a variable mortgage?

A trigger rate is the interest rate at which a fixed-payment variable mortgage's payment no longer covers the interest cost — meaning the amortization extends and negative amortization begins. When a trigger rate is hit, most lenders require the borrower to increase payments or make a lump sum payment. Trigger rates became a significant issue during the 2022-2023 rate-hiking cycle.

Can I convert from variable to fixed?

Yes. Most variable mortgage lenders allow conversion to a fixed rate at any time without a penalty. The fixed rate offered is the lender's current rate for a term at least as long as the remaining variable term. The main risk is that you are most motivated to convert when rates are already rising — meaning you may lock in at a higher rate.

Which is better: fixed or variable mortgage in Canada right now?

As of early 2025, fixed 5-year rates (approximately 4.79%-5.09%) are below variable rates (prime-based, approximately 5.20%-5.50%). Choosing variable only makes sense if you expect the Bank of Canada to cut rates enough during the term to make the variable average lower than today's fixed rate. For risk-averse borrowers, fixed offers certainty at a lower starting rate.

How does the amortization period affect fixed vs variable?

The amortization period (up to 25 years for insured mortgages, 30 years for uninsured) affects the monthly payment size but not the fixed vs variable comparison directly. Longer amortization periods mean more interest paid overall. With a variable rate, a longer amortization exposes more interest to rate fluctuations over time.

What is a hybrid or combination mortgage?

A hybrid mortgage splits the loan between a fixed-rate portion and a variable-rate portion — for example, 50% fixed at 4.89% and 50% variable at prime minus 0.50%. This hedges against rate risk. The penalty for breaking is a blend of the fixed and variable penalty rules. Hybrid mortgages are offered by most major Canadian banks.

Fixed vs Variable Mortgage Calculator 2025 — Canada

Compare interest paid over the term for fixed-rate certainty versus variable-rate best-estimate. Model your own variable rate assumption.

Reviewed by Canadian Money Help Editorial Updated April 24, 2026 Source FCAC — Fixed vs Variable Rate Mortgages

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Canadian mortgage borrowers choose between a fixed rate, which stays the same for the entire term, and a variable rate, which moves with the lender’s prime rate throughout the term. The right choice depends on the interest rate environment, the borrower’s risk tolerance, the term length, and whether the potential interest savings of a variable rate outweigh the payment uncertainty.

Quick Answer

As of early 2025, a typical 5-year fixed rate in Canada is approximately 4.79%-5.09% and a 5-year variable rate is approximately 5.20%-5.50% (prime minus 0.50% to 0.75%, with Bank of Canada prime at 5.95%). Variable rates are currently above fixed rates — an unusual environment. Historically, variable rates have saved borrowers money over the long run, but this depends on the rate trajectory during the term.

How Fixed and Variable Mortgages Compare

Fixed rate:
– Payment is the same for the full term (typically 1 to 5 years)
– Interest cost is certain — no exposure to rate increases
– Prepayment penalty is typically the greater of three months’ interest or Interest Rate Differential (IRD)
– IRD penalties can be very large on fixed mortgages when rates fall significantly

Variable rate:
– Rate moves with lender prime (which tracks the Bank of Canada overnight rate)
– Most lenders offer fixed-payment variable mortgages — the payment stays the same but the portion going to principal varies
– Adjustable-rate mortgages (ARMs) have payments that change with the rate
– Prepayment penalty is typically three months’ interest — simpler and usually smaller than IRD

Fixed vs Variable: 5-Year Comparison (Example)

Scenario	Mortgage	Start Rate	5-Year Interest Cost
Stable rates	$500,000 / 25 yr amortization	Fixed: 4.89%	~$115,400
Stable rates	$500,000 / 25 yr amortization	Variable: 5.20%	~$121,500
Rate drops 1.5% in yr 2	Variable: starts 5.20%	Falls to 3.70%	~$101,000
Rate rises 1% in yr 2	Variable: starts 5.20%	Rises to 6.20%	~$134,000

When Each Option Makes Sense

Fixed may be preferable when:
– Rates are at historical lows and likely to rise
– Budget certainty is critical (first-time buyer, tight cash flow)
– The term is short (1-2 years) and the fixed vs variable spread is small

Variable may be preferable when:
– The fixed-variable spread is large (1%+), providing a cushion against rate increases
– The borrower has the financial capacity to absorb payment increases
– The borrower is likely to break the mortgage early (variable penalty is smaller)
– Rates are expected to fall during the term

The Penalty Asymmetry

The most important but often overlooked difference between fixed and variable mortgages is the prepayment penalty. Fixed mortgages carry IRD penalties that can reach $20,000-$50,000 or more when rates have fallen. Variable mortgage penalties are three months’ interest — typically $5,000-$10,000 on a $500,000 mortgage. Borrowers who know they may sell or refinance before the end of the term should strongly consider this difference.

Verified Against Source

The Financial Consumer Agency of Canada (FCAC) provides guidance on fixed and variable mortgages at canada.ca/en/financial-consumer-agency/services/mortgages/fixed-variable-mortgages.html. OSFI Guideline B-20 governs the mortgage stress test applicable to all federally regulated lenders. Bank of Canada overnight rate announcements are published at bankofcanada.ca/core-functions/monetary-policy.

Edge Cases

Convertible variable: Most lenders allow conversion from variable to fixed at any time, usually without penalty, subject to the then-current fixed rate. This provides downside protection but also means you lock in when rates are typically already rising.

Trigger rate: On fixed-payment variable mortgages, if rates rise enough that the payment no longer covers the interest, the mortgage hits its trigger rate and the lender may require a payment increase or lump sum payment.

Open vs closed variable: Most variable mortgages are closed during the term. Some lenders offer open variable mortgages at higher rates that allow prepayment at any time without penalty.

Frequently asked questions

What is the difference between a fixed and variable mortgage?: A fixed mortgage has the same interest rate for the entire term (typically 1 to 5 years). A variable mortgage has a rate that changes when the lender's prime rate changes — which tracks the Bank of Canada's overnight rate. Fixed rates provide payment certainty; variable rates offer the possibility of lower costs if rates fall.
Are fixed or variable mortgage rates lower in Canada?: Historically, variable rates have been lower than fixed rates over the long run. However, this varies with the rate environment. In 2024-2025, variable rates were initially higher than fixed rates due to the Bank of Canada's elevated overnight rate. As the Bank cut rates in 2024-2025, variable rates fell and the gap narrowed. The comparison depends on current spreads and rate expectations.
What is the mortgage stress test?: All federally regulated lenders must qualify borrowers at the higher of: the contract rate plus 2%, or 5.25%. For a 4.89% fixed mortgage, the stress test rate is 6.89%. This ensures borrowers can afford payments if rates rise. Credit unions and private lenders may use different qualifying criteria.
What is the penalty for breaking a fixed mortgage early?: Fixed mortgage penalties are typically the greater of three months' interest or the Interest Rate Differential (IRD). The IRD is calculated based on the difference between your contract rate and the lender's current rate for a similar term. IRD penalties can reach $20,000-$50,000 or more when rates have fallen significantly since your mortgage was signed.
What is the penalty for breaking a variable mortgage early?: Variable mortgage penalties are almost always three months' interest on the outstanding balance. For a $500,000 mortgage at 5.20%, three months' interest equals approximately $6,500. This is generally much less than the IRD penalty on a comparable fixed mortgage.
What is a trigger rate on a variable mortgage?: A trigger rate is the interest rate at which a fixed-payment variable mortgage's payment no longer covers the interest cost — meaning the amortization extends and negative amortization begins. When a trigger rate is hit, most lenders require the borrower to increase payments or make a lump sum payment. Trigger rates became a significant issue during the 2022-2023 rate-hiking cycle.
Can I convert from variable to fixed?: Yes. Most variable mortgage lenders allow conversion to a fixed rate at any time without a penalty. The fixed rate offered is the lender's current rate for a term at least as long as the remaining variable term. The main risk is that you are most motivated to convert when rates are already rising — meaning you may lock in at a higher rate.
Which is better: fixed or variable mortgage in Canada right now?: As of early 2025, fixed 5-year rates (approximately 4.79%-5.09%) are below variable rates (prime-based, approximately 5.20%-5.50%). Choosing variable only makes sense if you expect the Bank of Canada to cut rates enough during the term to make the variable average lower than today's fixed rate. For risk-averse borrowers, fixed offers certainty at a lower starting rate.
How does the amortization period affect fixed vs variable?: The amortization period (up to 25 years for insured mortgages, 30 years for uninsured) affects the monthly payment size but not the fixed vs variable comparison directly. Longer amortization periods mean more interest paid overall. With a variable rate, a longer amortization exposes more interest to rate fluctuations over time.
What is a hybrid or combination mortgage?: A hybrid mortgage splits the loan between a fixed-rate portion and a variable-rate portion — for example, 50% fixed at 4.89% and 50% variable at prime minus 0.50%. This hedges against rate risk. The penalty for breaking is a blend of the fixed and variable penalty rules. Hybrid mortgages are offered by most major Canadian banks.

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Methodology

Total interest comparison using standard amortization formula over 5-year term. Variable scenarios model constant rate, rate decline, and rate increase. IRD penalty = (contract rate - current rate) x remaining balance x remaining months / 12. OSFI B-20 stress test at contract + 2% or 5.25%.