The Core Decision
When arranging a mortgage in Canada, one of the most fundamental decisions is whether to choose a fixed or variable interest rate. This choice affects your monthly payments, your total interest costs, and your exposure to rate fluctuations over the term of your mortgage. There is no universally correct answer — the right choice depends on current rate levels, your personal financial circumstances, and your psychological comfort with uncertainty.
Fixed Rate Mortgages
A fixed-rate mortgage locks in your interest rate for the full term — typically one, two, three, or five years. During this period, your interest rate and monthly payment remain constant regardless of what happens to market interest rates. This predictability makes budgeting easier and protects you from payment increases if rates rise during your term.
The trade-off is that you pay a premium for this certainty. Fixed rates are typically set higher than variable rates to compensate lenders for the interest rate risk they absorb by committing to a rate for a multi-year period. Additionally, breaking a fixed-rate mortgage before maturity can result in substantial prepayment penalties, typically the greater of three months’ interest or the interest rate differential (IRD), which can run into thousands of dollars.
Variable Rate Mortgages
Variable-rate mortgages fluctuate with the prime lending rate, which moves in response to Bank of Canada policy rate decisions. When the prime rate falls, your rate and payment (in some products) or the amortization of your loan (in adjustable-rate products) improve automatically. Conversely, when the prime rate rises, you are exposed to payment increases.
Historically, variable-rate mortgages have delivered lower total interest costs than fixed-rate mortgages more often than not, because short-term rates tend to be lower than long-term rates and because borrowers are compensated for taking on rate risk. Research by Professor Moshe Milevsky of York University found that Canadians would have been better off with a variable rate the majority of the time over several decades of data.
The 2026 Context
In 2026, the Bank of Canada has reduced rates meaningfully from the 2023 peak, and variable rates have fallen back below fixed rates in many cases. This creates a potentially favourable environment for variable-rate borrowers, particularly if further rate cuts are expected. However, the future path of rates is uncertain, and borrowers who cannot absorb payment increases should prioritize the certainty of a fixed rate.
Making the Decision
Consider your financial stability, income predictability, and ability to absorb payment increases when choosing between fixed and variable. If you are at the limit of your borrowing capacity and a significant rate increase would cause financial hardship, a fixed rate is the safer choice. If you have financial flexibility and can absorb some volatility, a variable rate may save you money, particularly if the rate-cutting cycle continues.
