Fixed vs. Variable Mortgage: Which Is Better in Canada?

Fixed-Rate Mortgages

With a fixed-rate mortgage, your interest rate stays the same for the entire term (typically 1 to 5 years). Your monthly payment remains constant regardless of market changes.

Pros:

• Payment certainty for budgeting
• Protection against rate increases
• No risk of payment shock
• Easier to qualify (lenders prefer predictable payments)

Cons:

• Typically higher initial rate than variable
• Breaking a fixed mortgage early can be expensive (IRD penalty)
• No benefit when rates drop

Variable-Rate Mortgages

With a variable-rate mortgage, your interest rate fluctuates with the lender's prime rate, which tracks the Bank of Canada's overnight rate.

Pros:

• Historically lower rates than fixed (typically 0.5 to 1.0% less)
• Potential savings when rates fall
• Lower penalty to break early (typically 3 months' interest)
• Rate can drop without refinancing

Cons:

• Payment uncertainty (rates can rise)
• Risk of payment shock during rate increases
• Psychological stress of fluctuating payments

Historical Performance

A Bank of Canada study found that variable-rate mortgages cost less than fixed-rate mortgages approximately 80 to 90% of the time over a 10-year period. However, this doesn't account for rate hike cycles where variable borrowers saw significant increases.

When to Choose Fixed

• You expect rates to rise
• You need budget certainty
• You plan to stay in the home long-term
• You're risk-averse
• Rates are historically low

When to Choose Variable

• You expect rates to fall or stay stable
• You can absorb payment increases
• You may sell or refinance soon
• The spread between fixed and variable is significant (>0.5%)