Fixed vs Variable Mortgage Rates in Canada

Published February 15, 2026 • 8 min read • By Mortgage Wave Team

Choosing between a fixed and variable mortgage rate is one of the most important decisions you'll make when getting a mortgage. It affects your monthly payment, your total interest cost, and your financial flexibility. In this guide, we'll break down everything you need to know to make the right choice for your situation.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage locks in your interest rate for the entire term of your mortgage (typically 1-5 years in Canada). Your rate and payment stay exactly the same regardless of what happens in the broader economy or with the Bank of Canada's key interest rate.

Pros of Fixed Rates

• Payment certainty — You know exactly what your mortgage payment will be every month for the entire term
• Budget stability — Easier to plan your finances when your largest expense is predictable
• Protection from rate hikes — If the Bank of Canada raises rates, your payment doesn't change
• Peace of mind — You won't lose sleep worrying about rate movements

Cons of Fixed Rates

• Higher starting rate — Fixed rates are typically 0.5%-1.5% higher than variable rates
• Higher penalties — Breaking a fixed-rate mortgage triggers an Interest Rate Differential (IRD) penalty, which can be very expensive ($10,000-$30,000+)
• Miss out on decreases — If rates drop, you're locked in at the higher rate
• Historical cost — Studies show variable rates have saved borrowers money more often than not

What Is a Variable-Rate Mortgage?

A variable-rate mortgage has an interest rate that fluctuates with the lender's prime rate, which is influenced by the Bank of Canada's overnight lending rate. Variable rates are typically expressed as "Prime minus" a discount (e.g., Prime – 0.95%).

There are two types of variable-rate mortgages in Canada:

• Variable Rate Mortgage (VRM) — Your payment stays the same, but the portion going to principal vs. interest changes
• Adjustable Rate Mortgage (ARM) — Your payment adjusts with each rate change

Pros of Variable Rates

• Lower starting rate — Typically 0.5%-1.5% lower than comparable fixed rates
• Lower penalties — Only 3 months' interest to break the mortgage (vs. potentially huge IRD for fixed)
• Historical advantage — Research by Dr. Moshe Milevsky (York University) found that variable rates saved Canadians money roughly 90% of the time over the past several decades
• Benefit from rate drops — When the Bank of Canada cuts rates, your effective rate decreases

Cons of Variable Rates

• Payment uncertainty — Your effective rate (and possibly payment) can change at any time
• Trigger rate risk — With a VRM, if rates rise enough, your payment may not cover the interest, causing negative amortization
• Stress factor — Rate announcement days can be anxiety-inducing
• Budgeting challenges — Harder to plan when your cost could change

Head-to-Head Comparison

Feature	Fixed Rate	Variable Rate
Starting Rate	Higher (e.g., 3.84%)	Lower (e.g., Prime – 1.10%)
Payment Stability	Guaranteed stable	Can fluctuate
Prepayment Penalty	Higher (IRD calculation)	Lower (3 months' interest)
Risk Level	Lower	Higher
Best When Rates Are...	Expected to rise	Expected to fall or stay flat
Historical Winner	~10% of the time	~90% of the time

What's Happening with Rates in 2026?

The Bank of Canada aggressively raised rates from 2022-2023, bringing the overnight rate from 0.25% to 5.0%. Since then, 9 rate cuts (June 2024–late 2025) brought the overnight rate to 2.25% and prime to 4.45%. The Bank held rates on January 28, 2026 — the second consecutive pause — as it watches global trade uncertainty and inflation data.

In this environment, variable rates are now significantly below fixed rates: the best 5-year variable is 3.35% (P-1.10%) vs. the best 5-year fixed at 3.69%. If the BoC resumes cutting, variable borrowers benefit immediately. If rates stay flat or rise, fixed offers protection.

The economic outlook is never certain. Trade tensions, inflation surprises, or global economic shifts could change the trajectory in either direction.

Which Should You Choose? A Decision Framework

Choose Fixed If:

• You're on a tight budget and can't absorb payment increases
• You'll lose sleep worrying about rate changes
• You're a first-time buyer and want predictability while you adjust to homeownership
• You plan to stay in your home for the full mortgage term (reducing the penalty risk)
• You believe rates are going to increase significantly

Choose Variable If:

• You have financial flexibility to handle potential payment increases
• You want to save money over the long run (statistically more likely)
• You might sell or refinance before your term is up (lower penalty)
• You believe rates will decrease or remain stable
• You're comfortable with some degree of uncertainty

The Hybrid Approach

Some borrowers split their mortgage between fixed and variable — for example, 50% fixed and 50% variable. This hedges your bets: you get the stability of fixed on half your mortgage while benefiting from the lower variable rate on the other half. Not all lenders offer this option, but it's worth discussing with your mortgage broker.

The Bottom Line

There's no universally "right" answer — it depends on your financial situation, risk tolerance, and market outlook. What's most important is that you make an informed decision based on your specific circumstances, not fear or speculation.

At Mortgage Wave, we help you analyze both options with real numbers based on your mortgage amount and current rates. We'll show you the actual dollar difference between fixed and variable, and help you understand the risks of each.