Fixed vs. variable, explained without the sales pitch
One rate holds for the term. The other moves with the Bank of Canada, eight decisions a year. Scroll through how each works, what each costs, and what breaking the term costs, on one illustrative Toronto mortgage.
At A Glance
The cheaper rate on day one is not always the cheaper mortgage.
8
Scheduled Bank of Canada rate decisions a year
Prime moves when the overnight rate does. A variable rate follows; a fixed rate ignores it until renewal.
1–5
Years: the common term range
The term is the contract. Amortization, typically 25 years, is the horizon to pay the mortgage to zero.
3
Months' interest: the typical variable penalty
A fixed penalty is the greater of three months' interest or the IRD, which can be large when rates have fallen.
Scroll to walk through it.
01 · Term vs. Amortization
The term is the contract with your lender — commonly one to five years — and the rate you sign is fixed or variable for that long. Amortization is the payoff horizon: typically 25 years, up to 30 in some insured and first-time cases. Every renewal is a fresh choice.
Term
Amortization
Length
Commonly 1 to 5 years
Typically 25 years; up to 30 in some insured and first-time cases
What it sets
Your rate and conditions until renewal
How fast the balance falls to zero
At the end
Renew, switch lenders, or refinance
The mortgage is paid in full
Fixed or variable
Decided each term
Does not change the horizon on its own
02 · How The Rate Moves
A fixed rate is locked for the term, so the payment does not change. A variable rate is prime plus or minus a lender discount, and prime moves when the Bank of Canada changes its overnight rate — eight scheduled decisions a year. Two illustrative paths, side by side.
Two illustrative paths over a five-year term, not a forecast. Rates fall 0.75% over two years then hold, or rise 0.50% and hold.
03 · The Payment
Same balance, same amortization: $3,321 a month at 4.50% fixed, $3,140 at 3.95% variable, and $3,304 if prime rises half a point — illustrative figures, not quotes. On an adjustable-rate mortgage the payment itself moves with prime. On a variable with fixed payments the payment holds and the interest-principal split shifts — rise far enough and you reach the trigger rate, where the payment no longer covers the interest.
Monthly payment on $600,000 over 25 years — illustrative, not a quote.
04 · Breaking Early
Break a fixed mortgage and the penalty is the greater of three months' interest or the interest-rate differential — and the IRD can be large when rates have fallen. Break a variable and it is typically three months' interest. If a sale or refinance is possible mid-term, this is the number to weigh.
Fixed
Variable
Penalty formula
The greater of three months' interest or the IRD
Typically three months' interest
IRD
Interest-rate differential: the gap between your rate and today's, over the months left
Not applied
When it gets large
When rates have fallen since you signed
It scales with your balance and rate, not with market moves
Weigh it if
A sale or refinance is possible mid-term
You want room to break or convert
05 · The Difference
Historically variable has often cost less over a full term, but not always. It suits borrowers who can absorb a moving payment or amortization; fixed suits a tight budget and a shorter certainty horizon. Convertible options sit between: a variable you can lock into fixed.
$181
per month, illustrative
Fixed at 4.50% vs. variable at 3.95% on $600,000, day one, before prime moves
Who It Suits
Neither rate is the smart one. The smart one is the rate that matches your budget, your timeline, and how likely you are to break the term before it ends.
You can absorb a payment or amortization that moves with prime.
A sale or refinance mid-term is possible; the penalty is typically three months' interest.
You want the option to convert to a fixed rate later.
You are comfortable with eight rate decisions a year touching your cost.
Your monthly budget is tight and a higher payment would strain it.
You need certainty over a shorter horizon: the next few years, not the next decade.
A variable with fixed payments could approach its trigger rate if prime rises.
A fixed-payment variable can stretch your amortization when prime rises, which matters if you are planning around a payoff date.
Questions
Sometimes. Convertible and hybrid products let you move a variable into a fixed rate during the term. Whether yours does, at what rate, and on what conditions is written into the lender's terms, so we read them before you sign, not after.
It applies to variable mortgages with fixed payments. Your payment stays the same while prime moves, so the interest-principal split changes. If rates rise far enough, the payment no longer covers the interest; that point is the trigger rate. Adjustable-rate mortgages avoid it because the payment itself moves with prime.
The greater of three months' interest or the interest-rate differential (IRD). The IRD can be large when rates have fallen since you signed. A variable penalty is typically three months' interest. If selling or refinancing mid-term is possible, the penalty belongs in the decision alongside the rate.
No. Historically variable has often cost less over a full term, but not always. Fixed suits tight budgets and shorter certainty horizons; variable suits borrowers who can tolerate payment or amortization changes. The right answer depends on your file, your timeline, and how you would sleep through eight rate decisions a year.
Educational content, not advice and not a commitment to lend. Rates and figures are illustrative examples, not quotes — rates change daily and depend on your file. Mortgage services provided by Matthew Im, Mortgage Agent Level 1 (Licence #M24000738), Get A Better Mortgage Inc., FSRA Brokerage Licence #10874. Speak to an accountant about tax questions.
Run It On Your File
One application, 97+ lenders, fixed and variable priced side by side, with the penalty terms read before you sign.
