Fixed vs variable mortgage in Canada: which should you choose?

How a variable rate actually works (and 'variable' vs 'adjustable')

A variable rate is quoted as prime minus a discount — for example, prime − 0.90%. Your discount is locked for the term, but the lender's prime rate moves up or down a few times a year in response to the Bank of Canada's overnight rate. When prime moves, your mortgage rate moves with it.

There's an important sub-distinction. With a true variable (or 'VRM') product, your payment often stays the same when prime changes — what shifts is how much of each payment goes to interest versus principal. With an adjustable-rate (ARM) product, the payment itself goes up or down with prime. Ask which one you're being quoted: a level-payment VRM can hit its 'trigger rate' if rates rise far enough, at which point the lender will require a higher payment anyway. Either way, a variable lets you convert to a fixed rate mid-term with no penalty, and it carries a much smaller break penalty if you sell or refinance early.

The break penalty: the biggest hidden difference

Roughly 6 in 10 Canadians break their mortgage before the term is up — they move, refinance, or restructure. So the cost of breaking early isn't an edge case; it's a core feature you should price in.

Breaking a variable mortgage almost always costs just three months' interest — a few thousand dollars on a typical mortgage. Breaking a fixed mortgage costs the greater of three months' interest or the Interest Rate Differential (IRD), and at the big banks the IRD calculation can run into the tens of thousands. If there's any real chance you'll sell or refinance before your term ends, that gap can dwarf the small rate premium you'd pay on variable. Our prepayment penalty calculator estimates both, and we explain how IRD is calculated in plain English.

Does fixed or variable make the stress test easier?

No — and this trips a lot of people up. Whether you choose fixed or variable, you must qualify at the mortgage stress test rate: your contract rate plus 2%, or 5.25%, whichever is higher. A lower variable starting rate does not let you borrow more, because you're still qualified at the stressed rate. So the choice between fixed and variable is about cost and risk over your term — not about how big a mortgage you can get approved for. You can see exactly how the stress test affects your number with our stress test calculator and affordability calculator.

What does history actually say?

Numerous Canadian studies — most famously decades of research by York University's Moshe Milevsky — found that borrowers who chose variable came out ahead the large majority of the time, because they spent more of the term paying a lower rate. That's the case for variable.

But history is not a promise, and averages hide painful stretches. Anyone who went variable right before the 2022 hiking cycle watched their rate climb sharply for over a year. The 'right' answer is partly mathematical and partly psychological: if a rising payment would force you to cut essentials or would simply keep you up at night, the certainty of a fixed rate has real value that no historical average captures. We'd rather you sleep well than win a coin-flip. Keep an eye on our mortgage rate forecast for where the market expects rates to head.

A hybrid you might not know about

You don't always have to pick a side. Some lenders offer a hybrid (or '50/50') mortgage that splits your balance into a fixed portion and a variable portion, so you hedge both ways — part of your payment is locked, part rides prime. It adds a little complexity (and can complicate switching lenders at renewal), but for an undecided borrower it can be a sensible middle path. There's also the term-length lever: if you like variable's flexibility but want to limit your exposure, a shorter fixed term can be a compromise. We'll lay out every option side by side — that's what an independent broker is for.