A fixed-rate mortgage keeps your interest rate the same for the entire term you select, which makes your payments predictable. A variable-rate mortgage is tied to your lender's prime rate and can change whenever the Bank of Canada adjusts its overnight rate, so your interest costs may rise or fall during the term. That is the textbook answer. The difference that actually costs Canadians money is the penalty for breaking the mortgage early, and almost nobody prices that in when they choose.
How fixed rates are actually set
A fixed rate locks for the length of your term, typically two, three, or five years. Lenders do not price those rates off the Bank of Canada's policy rate. They price them off Canadian bond yields with comparable terms, along with the overall economic climate. When inflation expectations rise, bond yields tend to climb, and lenders raise fixed rates to match. This is why fixed rates can move even when the Bank of Canada does nothing, and why they sometimes drift down while the policy rate holds steady. The two markets are related, but they are not the same thing.
How variable rates follow prime
Each bank sets its own prime rate, which is based on the Bank of Canada overnight rate, and variable mortgages are priced against it. As of May 2026, prime at Canada's big banks sat at 4.45%. Your contract expresses the rate as a discount or premium relative to prime, something like prime minus 0.50%, and that spread is locked for your term even as prime itself moves. When the Bank of Canada cuts, your borrowing cost falls within days. When it hikes, the increase reaches you just as fast.
VRM or ARM, and why most people do not know which they have
There is a split inside the variable category that matters more than most borrowers realize. A variable-rate mortgage, the VRM, has an interest rate that moves with prime while your monthly payment usually stays constant. When rates rise, more of that unchanged payment goes to interest and less to principal. An adjustable-rate mortgage, the ARM, also tracks prime, but the payment itself rises and falls with every Bank of Canada move.
Most Canadian mortgages sold as variable are actually VRMs, and that design carries a hidden edge case. If rates climb far enough that your static payment no longer covers the interest owing, you hit what lenders call your trigger rate, and the lender will require a higher payment, a lump sum, or a restructuring of the loan. Plenty of borrowers discovered this the hard way during the rapid rate hikes of 2022. Read your mortgage commitment carefully so you know exactly which product you are signing.
The break penalty is the biggest gap between the two
Here is the factor most Canadians overlook entirely. Fixed mortgages calculate break penalties using the Interest Rate Differential formula, and depending on where rates sit when you break, that can cost tens of thousands of dollars. Variable mortgages typically charge only three months' interest. The gap between those two numbers can dwarf whatever rate difference you agonized over at signing. We dig into the formula itself in what a mortgage prepayment penalty is and how it is calculated in Canada.
This matters because most homeowners do not hold their mortgage through the full five-year term. A sale, a refinance, a separation, a job in another city. Life intervenes, the mortgage breaks, and the penalty comes due. At Advantage Group Real Estate we tell sellers to get their break penalty in writing before they list, not after they have an accepted offer, because that number can genuinely change the math on a move.
How to actually choose
Historically, variable rates have saved borrowers more money than fixed. Past performance is no guarantee, and there have been stretches where fixed won comfortably. The honest framework is simpler than the rate forecasts make it look. If a payment increase would strain your budget or your sleep, take the fixed and buy the certainty. If you have room to absorb movement and a real chance of breaking the mortgage early, the variable's smaller penalty and historical edge make a strong case.
Most variable products can also be converted to a fixed rate mid-term without a penalty. The catch is that you convert at whatever fixed rate your lender offers on that day, which is rarely the rate you wish you had locked months earlier. Conversion is insurance against the future, not a time machine.
Whichever way you go, you qualify the same way. Both types are subject to the federal mortgage stress test, and OSFI confirmed in January 2026 that the rules remain unchanged. You must qualify at the higher of your contract rate plus 2% or the 5.25% floor. We break down what that does to your borrowing power in What Is the Mortgage Stress Test in Canada?. Jeremy Van Caulart leads Advantage Group Real Estate under Royal LePage Signature Realty in Toronto, and the team's standing advice on this question is blunt. Pick the mortgage that fits the life you are actually likely to live, not the one that wins the rate table today.
Frequently asked questions
Can I switch from a variable to a fixed rate mid-term?
Usually yes. Most variable mortgages include a conversion option that lets you lock into a fixed rate with the same lender without paying a break penalty. The catch is that you convert at the fixed rates available on that day, so conversion protects you from future increases rather than recovering rates that have already passed.
What is a trigger rate on a variable mortgage?
On a variable-rate mortgage with fixed payments, the trigger rate is the point where rising interest means your unchanged payment no longer covers the interest owing. When you reach it, your lender will require a higher payment, a prepayment, or a restructuring of the loan. Adjustable-rate mortgages avoid this because their payments move with prime automatically.
Which is better if I might sell before my term ends?
The variable usually carries less breakage risk. Ending it early typically costs three months' interest, while breaking a fixed mortgage uses the Interest Rate Differential formula, which can run into the tens of thousands of dollars. Ask your lender for a penalty estimate in writing before you commit either way.
Related reading: What Is a HELOC and How Does It Work in Canada?.
