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Short answer
A fixed rate stays the same for your whole term, so the payment is predictable; a variable rate moves with your lender's prime rate, which tracks the Bank of Canada's policy rate. Variable mortgages usually start lower and carry a much smaller penalty if you break them early — normally three months' interest — while fixed mortgages trade that flexibility for certainty and can charge a far larger interest rate differential. The right choice depends on how long you will keep the mortgage, how much payment movement your budget can absorb, and how much you value knowing the number in advance.
Key Takeaways
- A variable rate moves with the Bank of Canada's policy rate; a fixed rate stays the same for your entire term.
- Variable rates are usually offered at a lower starting rate, but expose you to payment or amortization changes if rates rise.
- Fixed rates make budgeting predictable but typically come with higher penalties if you break the mortgage early.
- Fixed rates are influenced by the bond market, not directly by the Bank of Canada — they can move differently from variable rates.
- The right choice depends on your risk tolerance, time horizon, and how long you plan to keep the mortgage.
When thinking about a mortgage, the word 'rate' often comes to mind. You likely know that interest rates affect your overall cost of borrowing, but do you understand the difference between a 'variable' rate and a 'fixed' rate? There are a few main factors that may affect how much you pay per month including your amortization period, down payment, overall terms, and what type of rate you choose. The rate you settle on often has a large impact on what portion of your payments goes towards interest and what portion goes towards paying down your principal balance.
What Exactly Is a 'Rate'?
Whether you're a first-time home buyer or you already own a home, you likely secured a mortgage through a traditional 'A' lender, an alternative B-lender, or even a private lender. When you secure a mortgage, your lender charges interest on your loan in order to cover their costs and leverage their risk of lending.
The interest rates that lenders charge are influenced by the financial markets and economy, which is why it's important to make sound decisions over what type of rate you choose.
The 411 of Variable Rates
A variable rate (or 'floating rate') will fluctuate during the term of a mortgage. Variable rates are influenced by lender prime rates, which are influenced by the Bank of Canada's policy rate (benchmark rate).
## The 411 of Fixed Rates
A fixed rate is a set rate that will stay the same until the term of your mortgage matures (your renewal). Fixed rates are very strongly linked to the bond market.
The Prime Lending Rate
The fashion in which rates are set is a complex process. When deciding on their policy rate, the Bank of Canada will assess factors such as:
The Bank of Canada sets dates to announce decisions regarding their benchmark rates — this way borrowers and professionals in the lending industry can prepare for potential shifts.
Which One Should You Choose?
There is no universally correct answer, but the decision usually comes down to four questions:
A useful middle path is a shorter fixed term, which buys certainty now without committing you for five years.
The Penalty Difference Most People Miss
The gap between fixed and variable is not only about the rate — it shows up most sharply if you break the mortgage early. Variable-rate mortgages are almost always capped at three months' interest. Fixed-rate mortgages charge the greater of three months' interest or the interest rate differential, and lenders calculate that differential in very different ways, with some using posted rates rather than the discounted rate you actually pay.
Since a large share of Canadians break or change their mortgage before maturity, the penalty formula deserves as much attention as the rate. You can estimate your own exposure with the mortgage penalty calculator before committing to either type.
Can You Convert a Variable Mortgage to Fixed?
Most variable-rate mortgages are convertible, meaning you can lock into a fixed rate mid-term without a penalty. Two details matter. First, you usually convert into the lender's current fixed rate for a term at least as long as the time remaining, and that rate is set by the lender rather than negotiated in open competition. Second, the decision is one-way — once you convert, you cannot go back to variable without breaking the mortgage.
Converting is a useful safety valve, but it is not a way to time the market, because by the time fixed rates look attractive the bond market has usually already priced the move in.
Comparing Apples to Oranges
Because fixed rates differ so significantly from variable rates, it's beneficial to understand the potential benefits and considerations of each:
Choosing a fixed or variable rate depends on many factors like inflation, economic forecasts, and your lifestyle and goals. Chatting with a licensed mortgage broker is a beneficial avenue for better understanding your needs.
For a confidential chat regarding your mortgage goals, reach out for a no-obligation call!
The information provided on this page is for educational purposes and should not be implicitly relied upon. Conditions may apply and information may not be 100% up to date. Contact a licensed mortgage professional for the most current conditions and program offerings.
Frequently Asked Questions
Is a variable or fixed mortgage better in Canada?
Neither is universally better. Variable suits borrowers who can absorb payment movement, may break or change the mortgage mid-term, or want the smaller three-months-interest penalty. Fixed suits borrowers who need budgeting certainty and expect to keep the mortgage for the full term.
Can I switch from a variable rate to a fixed rate?
Most variable-rate mortgages are convertible, so you can lock into a fixed rate mid-term without a penalty. You convert into the lender's current fixed rate for a term at least as long as the time remaining, and the change is one-way — going back to variable would mean breaking the mortgage.
Why is the penalty smaller on a variable mortgage?
Variable-rate mortgages are almost always capped at three months' interest. Fixed-rate mortgages charge the greater of three months' interest or the interest rate differential, and lenders calculate that differential in very different ways — some using posted rates rather than your discounted rate.
Do fixed and variable rates move at the same time?
No. Variable rates follow lender prime, which tracks the Bank of Canada's policy rate. Fixed rates follow the bond market, so they often move weeks earlier as bond yields price in expectations.
Does my variable payment change every time rates move?
It depends on your contract. Some variable mortgages adjust the payment with every rate change; others hold the payment steady and change how much of it goes to principal, which lengthens or shortens the amortization.
Have questions about variable vs. fixed rate mortgages: a complete canadian comparison?
Call for a free, no-obligation consultation, or run the numbers first with the mortgage calculators.
(604) 780-5173About the author
Kyle Benzies, Licensed Mortgage Broker
I'm a licensed mortgage broker serving clients across British Columbia, Alberta, and Ontario. I work with a network of over 100 lenders — banks, credit unions, monoline, and alternative lenders — to find financing that fits each client's situation rather than a single institution's product shelf. Everything I publish here is written to explain how Canadian mortgage lending actually works, in plain language.
Published November 22, 2025
