How a fixed-rate mortgage works
With a fixed-rate mortgage, your interest rate is locked for the entire term — typically five years in Canada. Your principal-and-interest payment never changes, no matter what the Bank of Canada or bond markets do in the meantime.
Fixed rates are priced off Government of Canada bond yields rather than the overnight rate directly. That is why a fixed rate can rise or fall even in months when the Bank of Canada leaves its policy rate unchanged.
How a variable-rate mortgage works
A variable rate is quoted as your lender's prime rate minus a discount (for example, 'prime minus 0.50%'). When the Bank of Canada changes its overnight rate, lenders move prime, and your rate moves with it.
There are two flavours. With a true variable, your payment stays fixed and the split between principal and interest shifts as rates move. With an adjustable-rate mortgage (ARM), the payment itself changes each time prime changes. Always confirm which one you are being offered.
The penalty difference most borrowers miss
If you break your mortgage early — to move, refinance, or take a better rate — the penalty differs dramatically by type. Breaking a variable mortgage usually costs three months' interest, a few thousand dollars on a typical balance.
Breaking a fixed mortgage triggers the interest rate differential (IRD), which compares your rate to current rates for the remaining term. At a big bank using posted rates, an IRD penalty can run into the tens of thousands. If there is any real chance you will break early, that risk belongs in your decision.
A simple framework for 2026
Skip the forecasting and start with your own situation. Two questions settle most decisions: how much room does your budget have if rates rise, and how likely are you to break the mortgage before the term ends?
- Choose fixed if your budget is tight, you value a set-and-forget payment, or the fixed-variable gap is small.
- Choose variable if you have a cushion for rate increases, you expect more rate cuts than the market does, or you may sell or refinance before the term ends.
- Whatever you lean toward, model both rates in our calculator and ask how you would feel if rates moved a full point against you.