Fixed vs Variable Mortgage in Canada: How to Choose
The lender hands you two numbers, and the cheaper one comes with a condition attached. That is the whole of the fixed vs variable mortgage decision in Canada. A fixed rate stays where it is for the entire term, and according to the Financial Consumer Agency of Canada (FCAC) it is usually higher than a variable rate for a similar term. A variable rate may rise and fall during the term and is usually lower to start. You are not choosing between two prices. You are choosing between a price and a bet, and the useful question is what the bet pays if you win and what it costs if you lose.
Most explanations of this stop at the definitions. Below, we put dollar figures on it: what the rate gap is actually worth over a five-year term, how quickly a single rate increase erases that advantage, and the specific way a variable mortgage with fixed payments can quietly stop reducing what you owe.
The two products, briefly
FCAC’s guide to choosing a mortgage (page dated October 15, 2025) draws the line simply. With a fixed rate, the interest rate and the payment stay the same for the entire term, so you know in advance how much principal you will have paid off by the end of it. With a variable rate, the rate moves during the term.
Variable comes in two shapes, and the difference between them matters more than most borrowers realise:
- Adjustable payments. The payment changes when the rate changes. A set amount of each payment goes to principal, so again you know your end-of-term principal in advance. What moves is your monthly cash requirement.
- Fixed payments. The payment stays the same and the split between interest and principal moves instead. This one has a trap in it, covered further down.
Variable rates are normally quoted as prime plus or minus a spread. FCAC’s own example: at prime plus 1%, a prime rate of 3.5% gives you 4.5%, and if prime moves to 3.7% your rate becomes 4.7%.
One more structural difference worth knowing before you sign. An assumable mortgage, where a buyer takes over your existing mortgage and property, is available on most fixed-rate mortgages and is not available on variable-rate mortgages or HELOCs.
What certainty actually costs
To put numbers on the gap we ran our own amortization on a $500,000 mortgage with a 25-year amortization, comparing a 4.50% fixed against a 4.00% variable. Those rates are chosen for the illustration, on FCAC’s point that a variable rate is usually the lower of the two for a similar term. They are not a claim about what any lender is quoting today. Both legs use semi-annual compounding, and the engine was validated against FCAC’s own published example to within $0.56, so what the tables show is the effect of the rate path and nothing else.
If the variable rate never moves for the full five years:
| Fixed 4.50% | Variable 4.00%, no change | |
|---|---|---|
| Monthly payment | $2,767.36 | $2,630.10 |
| Interest over the 5-year term | $105,023.82 | $93,075.64 |
| Balance after 5 years | $438,981.94 | $435,269.58 |
That is $137.26 a month, $11,948.19 less interest over the term, and $3,712.36 more principal retired. Half a percentage point does not sound like much until you total it.
FCAC’s own published table, in its page on interest on mortgages (last modified February 23, 2024), shows the same shape on a smaller loan. On a $300,000 mortgage over a 25-year amortization, 4.00% costs $1,587.06 a month and $55,845.39 in interest over five years, while 4.50% costs $1,660.42 a month and $63,014.30. The same half point is worth $73.36 a month and $7,168.91 of interest.
So the variable borrower who is right collects roughly twelve thousand dollars on our $500,000 example. Now the other side.
One increase, and the advantage is gone
Take the same $500,000 mortgage on an adjustable-payment variable starting at 4.00%, and move the rate to 5.00% after 24 payments, with the payment recomputed over the remaining 23-year amortization. Nothing dramatic: one percentage point, two years in.
- Months 1 to 24: $2,630.10 a month. Balance after 24 months, $475,634.68.
- Months 25 to 60: $2,889.39 a month, a jump of $259.29.
- Total interest over the five years on this path: $106,842.89, against $105,023.82 on the 4.50% fixed.
The variable borrower ends the term $1,819.07 worse off than if they had simply taken the fixed rate, and absorbed a payment increase of more than $250 a month along the way. The bet was never really “will rates rise”. It is “how much, and how soon”, and early increases hurt most because they compound over more of the term.
Here is the sensitivity, on the same mortgage, with the payment recomputed at each rate:
| Rate | Monthly payment | vs 4.00% per month | vs 4.00% per year |
|---|---|---|---|
| 4.00% | $2,630.10 | – | – |
| 4.25% | $2,698.30 | +$68.20 | +$818.40 |
| 4.50% | $2,767.36 | +$137.26 | +$1,647.16 |
| 4.75% | $2,837.28 | +$207.18 | +$2,486.12 |
| 5.00% | $2,908.02 | +$277.92 | +$3,335.09 |
| 5.50% | $3,051.96 | +$421.86 | +$5,062.28 |
| 6.00% | $3,199.03 | +$568.93 | +$6,827.19 |
The rough rule that falls out of this: on a $500,000 mortgage at these levels, each quarter point is about $70 a month. That is the figure to hold in your head when you are deciding how much rate movement your budget can actually absorb.
For context on how far the range can run, FCAC notes that between 2005 and 2015, interest rates varied from 0.5% to 4.75%.
The fixed-payment variable squeeze
This is the part that surprises people. FCAC’s warning is blunt: “A variable interest rate mortgage with fixed payments may be riskier than you expect. When interest rates rise, more of each payment automatically goes toward interest costs.”
Your payment does not change, so nothing looks wrong. What changes is where the money goes. On our $500,000 balance with the payment frozen at the 4.00% level of $2,630.10, the first-month split looks like this:
| Rate | Interest portion | Principal portion |
|---|---|---|
| 4.00% | $1,652.95 | $977.16 |
| 5.00% | $2,061.96 | $568.14 |
| 6.00% | $2,469.31 | $160.79 |
| 6.50% | $2,672.37 | -$42.27 (interest exceeds the payment) |
In our illustration the crossover sits at about 6.4% on the full balance, the rate at which a month’s interest equals the frozen payment. That is our arithmetic on this specific scenario, not a universal number: FCAC says the actual trigger point is listed in your mortgage contract, and that if market rates reach it the lender may increase your payments to ensure the mortgage is paid off within the amortization period.
The consequences FCAC spells out are worth reading twice. You could end up with none of your payment reducing principal, the total amount you owe can increase, and you may have to contribute more capital to avoid problems renewing. The mechanism runs the other way too: if the rate falls on a fixed-payment variable, more of each payment goes to principal and the mortgage is paid off faster.
The escape hatches, and what they cost
A lender may offer a rate cap, a maximum rate you can be charged on a variable, and a convertibility feature letting you convert to a fixed rate at any time during the term. Convertibility usually comes with a fee, conditions may apply, and the fixed rate available to you at that moment may be higher than the variable rate you were paying. It is protection, not a free option.
A hybrid or combination mortgage splits the loan, part fixed and part variable, giving partial protection if rates rise and partial benefit if they fall. The portions may carry different terms, which can make a hybrid harder to transfer to another lender.
The expensive exit is breaking the contract outright. Open mortgages allow prepayment without penalty; closed mortgages normally charge one. Per FCAC’s page on prepayment penalties (dated October 15, 2025), the penalty is usually the higher of three months’ interest on what you still owe or the interest rate differential (IRD), and lenders will usually use the IRD calculation if your mortgage rate is higher than the current rate and you signed the contract less than five years ago. FCAC’s worked example: a $200,000 balance at 6% with 36 months left in a five-year term, against a lender’s current posted 36-month rate of 4%. Three months’ interest is $3,000. The IRD is $12,000. You pay the higher one, plus possibly an administration fee.
The lesson is not that one product is cheap to break and the other is not. It is that the IRD arm grows with the gap between your contract rate and current posted rates for the remaining term, so the cost of walking away depends on where rates have gone since you signed. We work through that penalty arithmetic in full, including the discount clause that can nearly quadruple the same penalty, in breaking your mortgage in Canada.
You qualify the same way either way
The stress test does not care which you pick. OSFI’s minimum qualifying rate for uninsured mortgages (page last modified January 29, 2026) is the greater of your contract rate plus 2% or 5.25%, with OSFI labelling both the 2% buffer and the 5.25% floor as current values and reviewing them at least annually. The test applies to the contract rate you agreed to, fixed or variable. OSFI does not expect lenders to apply the MQR to uninsured straight switches at renewal, meaning a move to a new lender with no increase to the amortization or the loan amount.
Qualifying is a separate exercise from deciding what you can comfortably carry, which is the one that actually determines whether a variable rate is survivable. We worked through how much mortgage you can afford using the same kind of arithmetic.
How to actually decide
FCAC’s framing is the right one, and notice that it is about you rather than about rate forecasts. Fixed suits you if you want your payments to stay the same for the term, you want to know in advance how much principal you will have paid off by the end of it, and you think rates will rise. Variable suits you if you are comfortable with the rate and possibly the payment changing, and with following interest rates if your mortgage has a convertibility option.
Translate that into budget capacity. Using the ladder above, if $70 a month per quarter point is money you would have to find rather than money you already have spare, the $137.26 monthly saving in the no-change case above is not worth what it can turn into. If you have genuine room, the variable is a bet you can afford to lose.
And whichever you choose, you choose again soon. The interest rate is renegotiated at every term renewal, so payments may be higher or lower in future either way, which is why the decision is better treated as a recurring one than a once-in-a-lifetime call. Here is what happens to your payment at renewal and how to prepare for it.
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