Choosing between a fixed and a variable rate is one of the most common questions I hear. There’s no single right answer. It depends on your budget, your comfort with change and your plans for the next few years. Here’s how each one works and what to weigh.
Fixed rate
Your interest rate stays the same for the whole term, usually five years. Your payment never changes, so budgeting is easy.
The trade-off is the penalty if you break your mortgage early, for example if you sell, refinance or move. Fixed-rate penalties are usually the greater of three months’ interest or the interest rate differential (IRD). The IRD is roughly the difference between your rate and the lender’s current rate for the time left on your term, applied to your balance. When rates have dropped since you signed, it can be large.
Variable rate
Your rate is set as a discount from (or premium to) the lender’s prime rate, and it moves when prime moves, usually after a Bank of Canada decision. Variable rates come in two types:
| Type | What happens when rates change | Who offers it |
|---|---|---|
| Adjustable-rate (ARM) | Your payment goes up or down | Mostly mortgage-only lenders |
| Fixed-payment variable (VRM) | Your payment stays the same, but more or less of it goes to interest | Mostly the big banks |
With a fixed-payment variable mortgage, if rates rise enough, you can hit your trigger rate: the point where your payment only covers interest and your balance stops going down. At that point, your lender may require you to raise your payment, make a lump-sum payment or switch to a fixed rate. Adjustable-rate mortgages don’t have this issue, because the payment adjusts automatically.
Penalties are usually lower on a variable rate: typically three months’ interest. Most lenders also let you lock into a fixed rate partway through your term without a penalty.
How much the penalty difference can be
Here’s a simplified example of breaking a mortgage with 2.5 years left on a $400,000 balance at 4.5%:
| Variable | Fixed | |
|---|---|---|
| Three months’ interest | About $4,500 | About $4,500 |
| IRD (if the lender’s current rate is 3.5%) | Doesn’t apply | About $10,000 |
| Penalty you’d pay | About $4,500 | About $10,000 |
Every lender calculates the IRD differently. Some use the posted rate from when you signed, which can make the penalty much higher than this example. That’s why the lender you choose matters as much as the rate.
Fixed vs. variable at a glance
| Fixed | Variable | |
|---|---|---|
| Payment predictability | High | Lower (ARM) or stable until a trigger rate (VRM) |
| Benefits if rates fall | No | Yes |
| Risk if rates rise | None during the term | Higher payments or slower paydown |
| Typical penalty to break | Greater of 3 months’ interest or IRD | 3 months’ interest |
| Can switch types mid-term | Usually only by breaking | Usually can lock into fixed |
Questions to ask yourself
- How would I feel if my payment went up?
- Do I have room in my budget if rates rise?
- Is there a chance I’ll sell, move, refinance or separate during the term?
- Would I rather pay a little more for certainty, or take some risk for possible savings?
If you might break your mortgage early, the penalty difference can matter more than the rate difference.
What I do
I compare real options from different lenders, including how each one calculates its penalty, and walk you through what breaking each one could cost. No one can reliably predict rates, so I focus on what fits your life and your plans.
Read how this connects to your renewal.
Frequently asked questions
Is a fixed or variable mortgage better?
Neither is better for everyone. A fixed rate suits borrowers who want a predictable payment. A variable rate suits borrowers who can handle payment changes and may want lower penalties or the chance to benefit if rates fall.
How much is the penalty to break a fixed-rate mortgage?
The penalty to break a fixed-rate mortgage is usually the greater of three months’ interest or the interest rate differential. The IRD can be much larger, especially if rates have dropped since you signed.
How much is the penalty to break a variable-rate mortgage?
The penalty to break a variable-rate mortgage is usually three months’ interest on the balance owing.
What is a trigger rate?
A trigger rate is the interest rate at which a fixed payment on a variable mortgage only covers interest, so the balance stops going down. It only applies to variable mortgages with fixed payments.
Can I switch from a variable to a fixed rate?
Most lenders let you convert a variable-rate mortgage to a fixed rate during your term without a penalty, usually into a fixed term at least as long as the time remaining.
Next step
Every situation is a little different. If you’d like to talk through yours, book a consultation or read more about my renewal and switch service.
This guide is general information, not financial or legal advice. Rules, programs and rates change, so please confirm current details with me or the official sources linked above.