Fixed vs Variable Mortgage in Canada: How to Think About It

This article is general information, not financial advice. No one can reliably predict rates; this explains how each option works so you can decide with your own risk tolerance and a professional's input.

Fixed or variable is the first real decision on a Canadian mortgage, and it is usually framed as a bet on where rates are going. That framing is a trap, because no one, including your lender, reliably knows. A better approach is to understand exactly how each works, including the parts that only matter when rates move, and choose based on your own situation. Here is the plain version.

Fixed: the rate and payment are set

With a fixed-rate mortgage, your interest rate is locked for the entire term, and so is your payment. Nothing changes if the market moves. Fixed rates are usually a bit higher than a comparable variable rate, and you are paying that premium for certainty: you know exactly what you owe every month for the length of the term. If a stable, predictable payment lets you sleep, that is what fixed buys.

Variable: your rate moves with prime

A variable-rate mortgage is priced as your lender's prime rate plus or minus a set amount (the spread). When prime moves, your rate moves. There are two sub-types, and the difference matters:

• Variable rate, fixed payment: your monthly payment stays the same, but the split between interest and principal shifts. When rates rise, more of each payment goes to interest and less to principal, so you pay off the loan more slowly.
• Adjustable rate, adjustable payment: the payment itself changes when the rate changes, up or down.

The trigger rate: the risk hidden in "fixed payment" variables

The fixed-payment variable has a specific risk worth understanding: the trigger rate. The Bank of Canada defines it as the interest rate at which the interest portion of your payment equals your entire payment, meaning none of it goes to principal. If rates rise past your trigger rate, your fixed payment no longer even covers the interest. What happens next is lender-specific: some lenders require you to increase your payment, while others let the unpaid interest add to your balance until a separate balance threshold, sometimes called a trigger point, forces a change. Either way you end up paying more, so if you choose a fixed-payment variable, ask your lender exactly what your trigger rate is and how they handle it. (Note that "trigger rate" and "trigger point" are different: the rate is where interest eats the whole payment; the point is a balance threshold that forces action.)

The penalty difference nobody mentions until it hurts

If you break your mortgage early (to move, refinance, or switch), the penalty differs sharply by type, and this is where fixed can cost far more:

• Variable-rate mortgages usually charge a penalty of about three months' interest. Predictable, and usually modest.
• Fixed-rate mortgages charge the greater of three months' interest or the interest rate differential (IRD). The IRD compares your rate to current rates, and on a fixed mortgage broken partway through a term it can be thousands of dollars, sometimes shockingly large.

If there is any real chance you will move or refinance before the term ends, the break penalty deserves as much attention as the rate itself.

Convertibility

Many variable mortgages let you convert to a fixed rate during the term without penalty, though the details are lender- and product-specific. If flexibility matters, ask whether conversion is available and on what terms before you sign.

How to actually decide

Skip the rate prediction. Instead, weigh:

• Your tolerance for payment uncertainty. If a rising payment would genuinely stress your budget, fixed's certainty has real value.
• How long you will keep this mortgage unchanged. If you may break it early, the variable's smaller penalty is a meaningful advantage.
• Your financial cushion. A variable makes more sense if you could absorb higher payments (or the trigger-rate scenario) without strain.

There is no universally right answer, and reasonable people choose differently. If you are still comparing lenders and products, our guide on using a broker vs a bank covers where to shop.

Frequently asked questions

Is a fixed or variable mortgage better in Canada? There is no universal answer, and it should not rest on predicting rates. Fixed gives payment certainty at a usually higher rate; variable moves with prime and typically has a much smaller break penalty. The right choice depends on your tolerance for uncertainty and how long you will keep the mortgage.

What is a trigger rate? On a variable-rate mortgage with a fixed payment, the trigger rate is the rate at which your whole payment goes to interest and none to principal. Past it, the response is lender-specific: some require a higher payment, others let the shortfall add to your balance until a further threshold. Ask your lender what yours is and how they handle it.

Why can breaking a fixed mortgage be so expensive? Fixed mortgages charge the greater of three months' interest or the interest rate differential (IRD), and the IRD can run into thousands of dollars. Variable mortgages usually charge only about three months' interest.

Can I switch from variable to fixed later? Often yes. Many variable mortgages allow conversion to a fixed rate during the term, but it is lender- and product-specific, so confirm the terms before you sign.

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Fixed or variable, the mortgage is a long commitment where the fine print matters as much as the rate. Habyn helps homeowners keep the mortgage terms, renewal dates, and documents organized. See how Habyn helps homeowners.