A fixed-rate mortgage keeps your interest rate the same for the entire term you select, giving you predictable payments. A variable-rate mortgage is tied to your lender's prime rate and can change when the Bank of Canada adjusts its overnight rate, meaning your interest costs may rise or fall during your term.
A fixed-rate mortgage locks your interest rate for the length of your term, typically two, three, or five years. Canadian bond yields with comparable terms and the overall economic climate influence Canada's fixed mortgage rates. Because lenders price fixed rates off the bond market rather than the Bank of Canada's policy rate, fixed rates can move independently of overnight rate decisions. Fixed mortgage rates are driven by bond yields, and when inflation expectations rise, bond yields tend to increase, which leads lenders to raise fixed rates.
Each bank has its own prime rate, which is based on the Bank of Canada overnight rate and is used to determine variable interest rates. As of May 2026, the current prime rate at Canada's big banks was 4.45%. Variable-rate mortgages are typically expressed as a discount or premium relative to prime, such as prime minus 0.50%. There is an important distinction within the variable category that borrowers should understand. A variable-rate mortgage has an interest rate that moves with your lender's prime rate, but your monthly payment usually stays constant, and when rates rise, more of your payment goes to interest. An adjustable-rate mortgage also tracks prime, but the payment itself rises and falls with every Bank of Canada move. Most Canadian 'variable' mortgages are actually VRMs, so it is worth reading your mortgage commitment carefully to know which type you are signing.
One of the most significant practical differences between the two is the penalty for breaking your mortgage before the term ends. The single biggest factor most Canadians overlook is the break penalty: fixed mortgages use the Interest Rate Differential formula, which can cost tens of thousands of dollars; variable mortgages typically charge only three months' interest. This matters because most homeowners do not hold their mortgage through the full five-year term. A sale, refinance, or change in circumstances can trigger a break, and the penalty gap between the two types can be substantial.
Historically, variable rates have saved borrowers more money compared to fixed mortgage rates. That said, past performance is no guarantee. The right choice depends on your personal budget, your comfort with payment uncertainty, and how long you plan to stay in the property. Both types are subject to the federal mortgage stress test. OSFI confirmed in January 2026 that the stress test rules remain unchanged, and the qualifying rate is the higher of your contract rate plus 2% or the 5.25% floor. To learn more about how this qualifying rate affects your borrowing power, read What Is the Mortgage Stress Test in Canada?.
Related reading: What Is the Mortgage Stress Test in Canada?, What Is a Mortgage Prepayment Penalty and How Is It Calculated in Canada?, and What Is Mortgage Portability and How Does It Work in Ontario?.
