Fixed vs Variable — The Real Question
Once you're pre-approved and ready to choose a mortgage, the first big fork is fixed or variable. It feels like a bet on where rates are headed — but that's the wrong way to frame it. The better question is: how much payment uncertainty can you comfortably live with? Answer that honestly and the choice usually answers itself.
A fixed rate locks your interest rate for the whole term (typically five years). Your payment is identical every month, no matter what the economy does. A variable rate moves with your lender's prime rate, which tracks the Bank of Canada's overnight rate. When the Bank of Canada cuts or hikes, your rate follows.
Key Takeaway
How Each One Actually Works
There's an important Canadian nuance most people miss:
- Fixed rate. Your rate and payment are locked for the term. It's based on government bond yields, and it compounds semi-annually (the Canadian standard). No surprises — you'll pay the same amount in month one and month sixty.
- Variable rate mortgage (VRM). Your payment stays the same, but when prime moves, the split between interest and principal shifts. If rates rise, more of your payment goes to interest and you pay down principal more slowly.
- Adjustable rate mortgage (ARM). Your actual payment goes up or down each time prime changes. Less common, but more transparent — you always pay down principal on schedule.
💡 How a variable rate is quoted
Fixed vs Variable at a Glance
| Feature | Fixed | Variable |
|---|---|---|
| Rate basis | Government bond yields | Bank of Canada prime rate |
| Payment stability | Payment never changes during the term | VRM: payment fixed, interest split shifts. ARM: payment changes. |
| Typical cost | You pay a premium for certainty | Historically cheaper ~80% of the time |
| Breaking penalty | Greater of 3 months' interest or IRD — can be $10K–$30K+ | Usually 3 months' interest — often $2K–$6K |
| Flexibility | Locked in; costly to break or switch | Can usually convert to fixed mid-term, penalty-free |
| Risk level | Low — no surprises | Moderate — rate rises and falls with prime |
| Best when | Rates may rise, or you need certainty | Rates may fall, or you want flexibility |
| Ideal for | First-time buyers, tight budgets, long-term holders | Rate-savvy borrowers likely to move or refinance |
Where Rates Sit in 2026
As of mid-2026, the Bank of Canada has held its overnight rate at 2.25% for several consecutive decisions, leaving prime at 4.45%. After the deep cuts of 2024–2025, the Bank has settled into a long pause, and most forecasts expect rates to stay roughly flat through the rest of the year.
The practical effect: the best five-year fixed and best variable rates have nearly converged. When variable was a full point cheaper than fixed, the savings often justified the risk. With the spread this thin, the math is close to a wash — so the decision really does come down to certainty versus flexibility rather than chasing a big discount.
✅ What would tip the balance
The Penalty Gap — The Most Overlooked Factor
This is the part most buyers ignore and later regret. If you break your mortgage early — to sell, refinance, or take a better rate — the cost is dramatically different between the two:
- Breaking a variable mortgage usually costs three months' interest. On a $500,000 balance, that's roughly $4,500–$5,000.
- Breaking a fixed mortgage costs the greater of three months' interest or the Interest Rate Differential (IRD). On a large balance with years remaining, an IRD penalty can easily reach $15,000–$30,000.
If there's any real chance you'll move, refinance, or break the mortgage within the term, variable's low, predictable penalty is a genuine advantage — sometimes worth more than a small rate difference. For the full breakdown, see my guide on avoiding mortgage penalties.
Who Should Choose What
Here's the honest, plain-English version of how I talk this through with clients:
- Choose fixed if a payment increase of 1–2% would cause you real stress, you're a first-time buyer juggling a lot of new costs, your budget is tight, or you simply sleep better knowing the number won't move.
- Choose variable if you have a financial cushion and can absorb a rate bump, you think rates are more likely to fall, or there's a decent chance you'll move or refinance before the term ends and want the lower exit penalty.
- Consider a hybrid if you want to split the difference — some lenders let you put part of the mortgage on fixed and part on variable, hedging both ways.
⚠️ Both face the same stress test
Run Your Numbers Before You Decide
See how much you can borrow and what your payments look like at different rates with the BC mortgage affordability calculator — then reach out and I'll help you weigh fixed vs variable for your situation.