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Choosing between a fixed and a variable mortgage is one of the biggest decisions a Canadian borrower makes, and it's usually framed as a bet on where interest rates are heading. That framing isn't wrong, but it's incomplete — the right choice depends as much on your risk tolerance, your budget's flexibility, and the penalty you'd pay to break the mortgage as it does on rate forecasts.
How each one works
A fixed-rate mortgage locks your interest rate for the entire term (commonly five years). Your rate and payment don't move, regardless of what the Bank of Canada does. A variable-rate mortgage is tied to your lender's prime rate, which tracks the Bank of Canada's policy rate. When prime moves, your rate moves.
Variable mortgages come in two flavours. With a variable payment, your monthly payment changes as prime changes. With a fixed payment variable, the payment stays the same but the split between principal and interest shifts — and if rates rise far enough, you can hit your "trigger rate," where the payment no longer covers the interest and the lender asks you to increase it.
The core trade-off
Variable rates usually start lower than fixed rates, so you often pay less at the outset — but you carry the risk that rates rise during your term. Fixed rates cost a bit more for the certainty that your payment won't budge. In essence, you're paying an insurance premium (the higher fixed rate) for payment stability.
Historically, research covering several decades has found that borrowers who chose variable came out ahead most of the time, because rates spent long stretches flat or falling. But "most of the time" is not "always" — anyone who went variable just before the sharp 2022 rate increases learned that the downside can arrive quickly and painfully. Past averages don't protect an individual budget in a bad year.
The penalty difference most people miss
If you break your mortgage early — to move, refinance, or take a better rate — the penalty differs dramatically by type. Breaking a variable mortgage usually costs three months' interest, a relatively small, predictable amount. Breaking a fixed mortgage at a big bank often triggers an "interest rate differential" (IRD) penalty that can run to many thousands of dollars, sometimes far more than three months' interest. Since a large share of borrowers break their mortgage before the term ends, this is a real cost of fixed that rarely makes the headline comparison.
Which one fits you?
Lean fixed if: a rising payment would genuinely strain your budget; you value certainty and sleep-at-night peace of mind; you're stretched on the stress test and can't absorb increases; or you're confident you'll keep the mortgage for the full term.
Lean variable if: you have a financial cushion to absorb higher payments; you might sell or refinance before the term ends (lower break penalty); you believe rates are more likely to fall than rise; or you're comfortable trading certainty for a probable long-run saving.
A middle path some borrowers use is a shorter fixed term (one to three years) to get certainty now without locking in a long time, or a "hybrid" mortgage that splits the balance between fixed and variable portions.
Frequently asked questions
Is variable always cheaper than fixed? No. Variable usually starts lower and has won on average historically, but it exposes you to rising rates, and there are periods where fixed borrowers paid less.
What is a trigger rate? On a fixed-payment variable mortgage, it's the rate at which your set payment no longer covers the interest, prompting the lender to require a higher payment.
Which has a bigger penalty to break? Fixed. Breaking a fixed mortgage can trigger a large interest-rate-differential penalty, while variable is typically just three months' interest.