Fixed or Variable? Choosing a Mortgage Rate

Your lender quotes you two rates, and the variable one is lower. A fixed rate won't move your payment until your term ends. A variable rate follows prime, so what you pay can fall and it can rise. You're choosing where a rate change goes: into your payment, into your balance, or nowhere until you renew. If a higher payment would hurt, you'll pay a little more for the fixed rate and get a payment you can plan around.

Key takeaways

• Nobody can tell you which one ends up cheaper. You're really deciding how big a payment increase you could absorb.
• A fixed rate is usually quoted higher than a variable rate. You'll pay that difference to keep your payment the same.¹
• "Variable" covers two products. With adjustable payments your payment moves. With fixed payments your payment holds still and your balance moves instead, and it can grow.¹
• If your mortgage is uninsured, your lender has to approve you at your contract rate plus two points, or 5.25%, whichever is greater.³
• Breaking either one early costs you, and the published rule is the same for both. It's usually the higher of three months' interest or the interest rate differential.²

The two rates you'll be offered

A fixed rate doesn't move for your entire term, and it's usually quoted higher than a variable rate.¹ You pay that difference for two things: your payment doesn't change, and you'll know from the start how much principal you'll have cleared by the last payment of the term.¹

A variable rate is normally quoted to you as prime plus a percentage.¹ Prime sat at 4.45% on September 2, 2026, so a lender quoting you prime plus one point was offering you 5.45% that day, which is 4.45 plus one.⁴ That one point is for illustration only, since your own spread depends on the lender and on you. Your spread stays put once it's set, and prime moves underneath it, which is why your rate can change more than once inside a single term.

Lenders advertise a posted rate too. The posted five-year conventional rate was 6.09% on September 2, 2026.⁵ You're unlikely to pay it. A discounted rate sits below the posted one, and that discount can be worth thousands of dollars to you over a mortgage.¹ How much you're offered depends partly on your credit history.¹

Is a variable rate cheaper?

Sometimes, though you'll only know once the term has run and you can look back. You can still work out today what the gap is worth. On $300,000 amortized over 25 years, 4.50% puts your payment at $1,660.42 a month, and 5.00% puts it at $1,744.81.¹ Half a percentage point costs you $84.39 a month, or a little over a thousand dollars a year.

That's the trade in one number. A variable rate quoted half a point under a fixed one leaves $84.39 a month in your account now, and you carry prime until your term ends.

Your own balance won't be $300,000, and the gap scales with it: a bigger mortgage widens it, a smaller one narrows it. Run your own numbers against the amount you'd really be borrowing before you decide what half a point is worth to you.

The variable mortgage where your payment never moves

Ask which kind of variable you're being offered, because there are two and they don't behave alike at all.

With fixed payments, the same amount leaves your account whatever prime does, and the split inside it changes instead. When rates rise, more of your payment goes to interest and less of it to your principal.¹ If they rise far enough, "you could end up in a situation where none of your payment goes toward paying down the principal. Instead of paying down your mortgage, the total amount you owe on your mortgage will increase."¹ So you can pay every bill on time, miss nothing, and still owe more in December than you did in January.

There's a level called your trigger point, and once market rates reach it your lender may raise your payment so your mortgage still clears by the end of its amortization. Yours sits in your own contract.¹ Lenders ask to hear from you as soon as a rising rate starts to bite, rather than once it's grown.¹

With adjustable payments, your payment changes when your rate changes. A set amount of every payment goes to principal and the interest portion moves, so you'll know from the start how much you'll have cleared by the end of your term.¹ A rate rise reaches you right away, in the amount that's leaving your account each month.

The rate you qualify at is not the rate you pay

Before a federally regulated lender approves you, it has to test your payments at a rate above the one on your contract. The Office of the Superintendent of Financial Institutions sets that test at the greater of your contract rate plus 2%, or 5.25%.³ It covers uninsured mortgages, and the regulator obliges federally regulated lenders to apply it.³

Those two parts swap over at 3.25%. Below a contract rate of 3.25% you're tested at the flat 5.25%. At 3.25% or above, your rate plus two points is the bigger number, so that's what you're held to. With prime at 4.45%, no rate you're likely to be quoted today comes near that crossover.⁴

If you've just been told you qualify for less than you expected, that's usually the reason. That tested figure caps how much you can borrow, and it applies the same way to a fixed rate and a variable one.

Breaking the contract before the term ends

Your lender charges a prepayment penalty when you pay down faster than your contract allows. You'll owe one if you go over your allowed extra amount, break the contract, take your mortgage to a different lender before your term ends, or clear the balance early, and that includes the day you sell your home.² If yours is an open mortgage rather than a closed one, you can prepay it and owe nothing.²

Your lender compares two numbers, and the penalty is usually the bigger of them: three months of interest on what's left owing, or the interest rate differential.² The differential is the gap between the interest left to run at your rate and the interest left at a comparable rate today, and lenders reach for it when your rate sits above current rates and you signed within the last five years.²

One rule covers both types. There's no separate published penalty for a variable mortgage and none for a fixed one, and each lender runs the calculation its own way.² Federally regulated banks have a prepayment penalty calculator on their website, so you can get your own figure in a few minutes on the balance you'd be breaking.²

Can you switch from variable to fixed later?

You can, but only if your contract's got a convertibility feature, and three conditions come with it. You usually pay a fee. Other conditions may apply. And your new fixed rate may be higher than the variable rate you've been paying.¹

That third condition's where the damage is. Rates have usually already risen by the time you want to convert, and fixed rates are more expensive at that point too. So a conversion option gives you a real way out, as long as you know the rate you'd convert to is whatever's on offer that day rather than the rate you signed at.

What sits in the contract besides the rate

Five things shape this as much as the number itself, and none of them shows up on a rate sheet.

1. Your prepayment privileges. How much extra you can pay each year without a penalty depends on your lender, and unused room usually can't be carried into the following year.²
2. An interest rate cap. Some lenders will cap the rate they can charge you, whatever prime does. It isn't a standard feature, so it comes up only if you raise it.¹
3. A convertibility option. The switch to a fixed rate, with its fee and its rate on the day.
4. The term length. Lenders typically quote higher rates on longer terms, though not always.¹ A shorter term usually costs less, and it brings this same choice round again sooner.
5. A hybrid. Part of your rate fixed, part variable, so you get partial protection if rates rise and partial benefit if they fall. Each portion can carry its own term, which makes a hybrid harder to move to a different lender.¹

Your prepayment room, your cap, your conversion option and your trigger point all sit in your mortgage documents rather than in any public table. They differ from lender to lender, so nobody else's copy will tell you what yours says.

How this looks for a family and for someone retiring

Nadia and Theo have two incomes between them, and the account's still empty a few days before payday. A variable rate would leave them $84.39 a month better off now and put the same amount at risk later. For a household with nothing spare, the question is which bill an extra $84.39 would displace, and "Treading Water" is the month they're budgeting against.

Joanne is retiring soon, on her own, and looking at a smaller place. She'll be tested at her contract rate plus two points, so a 5.50% quote means qualifying at 7.50%.³ On a retirement income that doesn't grow, that tested payment decides what she can buy at all, long before fixed or variable comes into it. She's already priced a year of retirement in "Counting What's Already There", so that tested payment has a total to sit against.

Picking one, in practice

Most people whose budget has nothing spare land on a fixed rate, because a payment they can plan around is worth more to them than the discount, and the extra costs them little next to an increase they couldn't cover.

Most people with room to absorb a rise, and a real chance of moving or selling inside the term, land on variable, because they keep the lower rate while it lasts.

Few people settle this on a view about where rates are going, since nobody selling either product knows that. It comes down to whether you could still cover the bills in a month with a bigger payment in it, and how likely you are to still hold this mortgage in three years.

If you're already on a variable mortgage with fixed payments, the choice you made a year ago is behind you. Your balance either fell over the past year or it didn't, and your lender can tell you which.

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Common questions

Does the Bank of Canada set my mortgage rate?+

No. Your lender sets its own prime rate, and what it costs that lender to fund itself is shaped by the Bank of Canada's target for the overnight rate. If you're on a variable rate, you're normally quoted your lender's prime plus or minus a percentage, so your rate moves when your lender moves its prime.

Is a variable rate always cheaper than a fixed rate?+

No. You're normally quoted a lower rate at the start, but it moves with prime for your whole term, so what you end up paying depends on where rates go. Nobody can tell you that in advance, which is why your choice is really about the risk you can carry rather than the smaller number.

What is a trigger point?+

It's the level market rates have to reach before your lender can raise your payment on a variable mortgage with fixed payments, so you still clear the mortgage by the end of your amortization. There's no national figure to look up, because every contract sets its own.

Do I have to pass the stress test on a variable rate as well as a fixed one?+

Yes. If your mortgage is uninsured, you're tested at the greater of your contract rate plus 2% or 5.25%, whichever type you pick, and your lender applies it either way.

Can I make extra payments on either type?+

Usually yes, though every contract caps how much. Go over the cap and you'll owe a prepayment penalty, and most lenders won't let you save unused room for a later year. An open mortgage is the exception, since you can pay it down freely.

Is the penalty smaller for breaking a variable mortgage?+

It often works out that way, but the published rule doesn't say so. Your lender weighs three months of interest against the interest rate differential and charges you whichever is bigger, whatever type you hold. Only your own bank's prepayment calculator will give you your real figure.

Sources

1. FCACInterest on mortgages. Fixed and variable rates, prime and posted rates, the $300,000 payment table, fixed and adjustable payments, trigger points, rate caps, convertibility and hybrid mortgages. Accessed 2026-09-06.
2. FCACMortgage fees: Prepayment penalties. When a penalty applies, how it is sized, prepayment privileges and lender calculators. Accessed 2026-09-06.
3. OSFIMinimum qualifying rate for uninsured mortgages. The greater of the contract rate plus 2% or 5.25%. Accessed 2026-09-06.
4. Bank of CanadaPrime rate, series V80691311. 4.45%, observation dated 2026-09-02. Accessed 2026-09-06.
5. Bank of CanadaConventional mortgage: 5-year, series V80691335. 6.09%, observation dated 2026-09-02. Accessed 2026-09-06.

Educational, not financial advice. Figures verified against primary sources on the date shown.

See it in a story: "Treading Water," where two incomes still run out before payday. If you're still adding up what the house itself takes to get into, start with what buying a home costs on closing day, or browse the whole budgeting hub.