Fixed vs Variable Rate

A fixed rate stays the same for your whole mortgage term, while a variable rate moves up or down with your lender's prime rate.

A fixed-rate mortgage keeps the same interest rate for the whole term. A variable-rate mortgage has a rate that can rise or fall during the term. Lenders usually set a variable rate as their prime rate plus or minus a margin. Prime is the rate a lender uses to set its posted rates. When prime changes, a variable rate changes with it.

A fixed rate gives you certainty. Your payment stays the same for the term, which makes budgeting easier. The Financial Consumer Agency of Canada notes that fixed rates are usually higher than variable rates, so you generally pay for that predictability.

Variable-rate mortgages come in two forms. With adjustable payments, your payment changes when the rate changes, and a set portion still goes to principal. With fixed payments, the payment stays the same, but more of it goes to interest when rates rise. If rates rise far enough, you can reach your trigger rate, where the payment covers only interest and none of the principal.

Some lenders offer hybrid mortgages, where part of the rate is fixed and part is variable. These can be harder to transfer to another lender. Breaking a closed mortgage before the term ends usually costs a penalty. It is often the greater of three months' interest or the interest rate differential. Lenders typically use the differential when your rate is above current rates. Ask how your lender would calculate the penalty for each option before you choose.

The right choice depends on how much payment uncertainty you can absorb and how long you expect to keep the mortgage. Trying to predict where rates will go is not a reliable basis for the decision. With a federally regulated lender, either option must pass the stress test, which qualifies you at a rate above your contract rate.

General information only, not legal, tax, or financial advice. Rules change and vary by province; confirm the current details with the relevant authority before you rely on them.