• What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage locks your interest rate for the entire term of the mortgage — typically five years in Canada, though one-, two-, three-, and four-year terms are available. Your payment stays the same every month regardless of what happens to interest rates in the broader economy. If rates rise significantly after you lock in, you continue paying your original rate. If they fall, you do not benefit until renewal.

The certainty of a fixed rate makes budgeting straightforward and removes anxiety about rate movements. This predictability has a cost: fixed rates are typically set higher than variable rates to compensate the lender for the certainty they are providing you.

• What Is a Variable-Rate Mortgage?

A variable-rate mortgage is tied to your lender's prime rate, which itself moves with the Bank of Canada's overnight rate. Your effective rate is expressed as prime plus or minus a spread — for example, prime minus 0.75%. When the Bank of Canada raises rates, your rate goes up; when they cut, it goes down. Variable mortgages come in two varieties: adjustable-rate mortgages, where the monthly payment changes as rates move, and variable-rate mortgages with a fixed payment, where rate changes affect how much of your payment goes toward principal versus interest (and therefore your amortization length).

• How the Bank of Canada Affects Your Rate

The Bank of Canada sets its overnight lending rate approximately eight times per year. When the economy is running hot and inflation is above target, the Bank raises rates to slow borrowing and spending. When growth slows or unemployment rises, it cuts rates to stimulate the economy. These decisions flow almost immediately into lenders' prime rates, which in turn affect every variable-rate mortgage in Canada.

Fixed rates, by contrast, are influenced more by the bond market — specifically five-year Government of Canada bond yields — and can move independently of the overnight rate. This means fixed and variable rates sometimes move in opposite directions over short periods.

• Historical Performance: What the Data Shows

Historically, variable-rate mortgage holders in Canada have paid less interest over time than those who chose fixed rates — but this advantage is not constant or guaranteed. Research from York University found that variable rates outperformed fixed rates in the majority of five-year periods over several decades. However, the rate cycle that began in 2022 reversed this pattern sharply: borrowers who locked into low fixed rates in 2020 or 2021 fared significantly better than those on variable rates when the Bank of Canada raised its overnight rate from 0.25% to 5.0% in under two years.

Past performance is useful context, not a predictor. The right question is not which has historically been cheaper but which best fits your current circumstances and rate outlook.

• Side-by-Side Comparison

• Breaking Your Mortgage Early: The Penalty Difference

One of the most overlooked factors in the fixed vs variable decision is the cost of breaking the mortgage early. Life circumstances change — job relocations, divorces, and financial hardship all happen. Variable-rate penalties are almost always three months' interest, a relatively predictable and modest amount. Fixed-rate penalties use the Interest Rate Differential (IRD), which is calculated based on the gap between your contract rate and the current rate for the remaining term. In a falling rate environment, IRD penalties can be enormous — tens of thousands of dollars on a typical Canadian mortgage.

If there is any meaningful chance you will sell or refinance before the end of your term, the lower penalty structure of a variable rate is a significant advantage that rarely appears in fixed vs variable comparisons.

• Who Fixed Rates Are Right For

A fixed rate makes the most sense if you are at the top of your budget and cannot absorb payment increases, if you value certainty and find rate fluctuations stressful, if you are buying in a rate environment where variable rates are close to or above fixed rates (eliminating the typical variable discount), or if you plan to stay in the home for the full term without refinancing or selling early.

• Who Variable Rates Are Right For

A variable rate makes sense if you have a financial cushion that can absorb higher payments if rates rise, if you believe the rate cycle is at or near its peak and cuts are likely over your term, if you have a shorter timeline (you plan to sell or refinance within a few years and want a lower penalty), or if the variable rate discount relative to fixed is meaningful — 0.5% or more over a five-year term compounds into significant savings if rates hold or fall.

• What Happens at Renewal

The mortgage term (one to five years) is separate from the amortization period (the full repayment schedule, typically 25 or 30 years). At the end of each term, your mortgage renews and you renegotiate the rate. This means most homeowners will hold both fixed and variable mortgages at various points over the life of their home — and the right choice can legitimately change at each renewal based on where rates are and what your financial situation looks like. Never simply auto-renew with your existing lender without shopping the market first.

• The Bottom Line

Fixed rates buy certainty; variable rates offer potential savings and lower break penalties. Neither is the default right answer. Run the numbers at the current spreads, honestly assess your budget flexibility, and consider how likely it is that you will need to break the mortgage early. If you are genuinely unsure, speaking to a mortgage broker who can model both scenarios for your specific situation will be more valuable than any general rule of thumb.