Mortgage
Variable vs. Fixed Mortgage Rates: How They’re Actually Set
Two mortgages, two completely different markets. Here's how the Bank of Canada moves variable rates and the bond market moves fixed ones — in plain English.
Most clients ask me “variable or fixed?” expecting a one-word answer. That’s the wrong question — and I’m not going to recommend one over the other in this post. The right starting point is understanding how the two are priced, because that’s what tells you how each will behave when the economy shifts. Once you understand the mechanics, the choice becomes a matter of your own situation.
Variable rates: tied to the Bank of Canada
A variable mortgage rate moves with each lender’s prime rate. Prime is set by the bank, but it tracks the Bank of Canada’s overnight policy rate — almost always at roughly policy + 2.20%. So when the Bank of Canada cuts or hikes the overnight rate by 25 basis points, prime usually moves the same 25 bps within a day or two, and variable mortgages reprice with it.
The chain looks like this:
Bank of Canada policy rate → lender prime rate → your variable mortgage rate
Lenders quote variable mortgages as prime minus a discount (e.g. P−0.85) or sometimes prime plus a premium for non-prime borrowers. Your rate today equals prime minus that discount; when prime moves, so does your rate.
As of May 2026, the Bank of Canada’s policy rate sits at 2.25% and Canadian bank prime rates are around 4.45%. The Bank is widely expected to hold rates steady through the rest of the year, with cuts or hikes contingent on inflation data.
Fixed rates: tied to the bond market
A 5-year fixed mortgage isn’t set by prime — it’s set by what happens in the 5-year Government of Canada bond market. Lenders fund fixed mortgages by borrowing from bondholders, so the cost of that bond debt becomes the floor for fixed mortgage pricing. The chain:
5-year Canada bond yield + lender spread → your fixed mortgage rate
The lender spread covers their operating costs, profit margin, and credit risk — it’s typically 1.50–2.00%above the bond yield, depending on the lender and the borrower’s risk profile.
Why does this matter? Bond yields move daily, and they anticipate where the Bank of Canada is going months before the Bank actually moves. That’s why fixed mortgage rates can rise or fall beforethe Bank of Canada announces anything — the bond market has already priced it in.
As of early May 2026, the 5-year Canada bond yield is in the 3.10%range, which has nudged fixed mortgage rates up roughly 25–40 basis points in recent months even though prime hasn’t moved.
Why this difference matters to your decision
Knowing the mechanics changes how you think about each:
- Variable moves only when the Bank of Canada moves. If you believe rates will fall, variable captures those drops without renegotiating. If they rise, your payment can go up.
- Fixedlocks the bond market’s expectations into your contract for the full term. You’re trading the chance to benefit from rate cuts for the certainty that your payment won’t change.
- A variable rate today might be higherthan a fixed rate today because the bond market is pricing in expected rate cuts — or it might be lower if the market expects hikes. The relationship inverts frequently.
Two questions worth asking yourself
- Can your budget absorb a payment increase?Variable rates can rise. If your budget is tight, that’s a meaningful risk.
- How long is your time horizon?If you’re likely to refinance, sell, or substantially change the mortgage in 1–3 years, the lower break penalty on variable mortgages (typically 3 months’ interest) can save you serious money compared to a fixed mortgage’s interest rate differential penalty.
The point isn’t which is “better”
It’s that they respond to entirely different forces. Anyone telling you one is universally better than the other isn’t doing the math for your specific situation — they’re selling you something.
If you want to model what each would actually cost you on a specific property, the mortgage calculator on this site lets you toggle rate and amortization. For a real quote based on your credit, income, and the property, send me a note and I’ll shop the 97+ lenders we work with.
Rates and policy figures cited are as of May 2026 and change frequently. Sources: Bank of Canada, Canada Bond Yields.