Fixed vs Variable Mortgage in Ontario: How to Decide in 2026

The Question That Follows Every Rate Decision

Every time the Bank of Canada announces a rate decision, the same question comes up: should I go fixed or variable? Most advice online comes down to "it depends on your risk tolerance," which does not help much.

This guide explains how each type works, what the main trade-offs are, and walks through an example using assumed rates so you can see how outcomes can differ. It does not predict where rates are going, because nobody can do that reliably. For advice on your own situation, speak with a licensed mortgage professional.

How Fixed and Variable Rates Work

Fixed-rate mortgages

The Financial Consumer Agency of Canada (FCAC) explains that a fixed interest rate stays the same for the entire term, and that fixed rates are usually higher than variable rates for a similar term.6 Your rate and payment stay the same until the term ends.

Fixed rates are not set directly by the Bank of Canada's overnight rate, which is why a change in the policy rate does not always move fixed rates in the same direction at the same time. Ask your lender how its fixed rates are set.

Variable-rate mortgages

A variable rate may increase and decrease during the term.6 It is usually quoted as the lender's prime rate minus or plus an amount. For example, a rate of prime minus 0.50% is half a point under whatever prime is on that day.

There are two common payment structures, and the difference matters:

• Adjustable payment: your payment changes when the rate changes.
• Fixed payment with a variable rate: your payment stays the same, but when rates rise more of each payment goes to interest. FCAC warns that you could end up in a situation where none of your payment goes toward paying down the principal, and advises contacting your lender as soon as possible if that happens.6

If you are considering a variable rate, ask the lender which structure it uses and what happens to your payment if rates rise.

Why History Is Only Background

Variable rates usually start lower than fixed rates, which is the main attraction. But the starting rate is only part of the story. What you pay over the term depends on what rates do after you sign.

Recent history shows how much that can matter. The Bank of Canada raised its policy rate to 0.50% in March 20224 and to 5.00% by July 2023.5 Borrowers with variable-rate mortgages over that period saw their costs rise sharply, while borrowers who had locked in a fixed rate before the increases were protected from them for the rest of their term. Which option turns out cheaper depends on the period you look at, and past results do not tell you what the next five years will look like.

Where the Bank of Canada Stands

The Bank of Canada's policy interest rate is 2.25%, unchanged since the October 29, 2025 cut. The Bank held the rate at 2.25% at each of its 2026 announcements so far: January 28, March 18, April 29, June 10, July 15 and September 2.1

On September 2, the Bank said the economy and inflation were developing broadly as forecast in its July report, noted higher upside risks to inflation, and said it is prepared to adjust monetary policy as needed.2 Its next scheduled announcements are October 28 and December 9, 2026.1

We do not quote current fixed or variable mortgage rates in this article, because rates change often and depend on the lender, the product and your file. This guide is accurate as of the "Last updated" date above. Ask a licensed professional for current options.

The takeaway is that the policy rate has been steady for most of this year, and the Bank has said it can move either way. That is a reason to ask what a variable payment would look like if rates rose, not only what it looks like today.

Side-by-Side Comparison

Rates, penalty methods and options differ from lender to lender. Your mortgage contract is the final word.

The Penalty Question

Many borrowers focus on the rate and overlook what it costs to leave a mortgage early. People sell, refinance, separate, relocate or consolidate debt, and the penalty can matter as much as the rate.

Fixed: three months' interest or the IRD

FCAC says the prepayment penalty will usually be the higher of three months' interest on what you still owe or the interest rate differential (IRD). The lender will usually use the IRD if your mortgage rate is higher than the current rate and you signed the contract less than five years ago.7

FCAC also notes that the calculation varies from lender to lender. In broad terms, the lender works out the remaining interest on your term at two rates, one based on your contract rate or the posted rate at signing and one based on a current rate for a similar term, and the difference is the IRD.7 Because lenders treat posted and discounted rates differently, two lenders can give very different numbers for similar mortgages. Read how your contract calculates it.

Simple illustration (not a quote): if the rate difference were 0.70%, the balance $480,000 and the time left 2.5 years, a straightforward IRD calculation would be $480,000 x 0.70% x 2.5 = $8,400. Real calculations differ by lender and can be higher or lower.

Variable: check your contract

Some variable-rate mortgages use three months' interest as the penalty. As an illustration, on a $500,000 balance at an assumed 3.50%, three months' interest is $500,000 x 3.50% / 4 = $4,375. Check your own contract, since terms differ by lender.

The bottom line: if there is a realistic chance you will sell, refinance or restructure before the term ends, ask each lender for the penalty method in writing and compare it as carefully as you compare rates.

A Worked Example With Assumed Rates

* This example is for illustration only. The rates are assumptions chosen to show how the maths works. They are not current market rates or a quote, and individual outcomes depend on circumstances, credit and lender criteria. OAC. Rates subject to change. Conditions apply.

Assume a $520,000 mortgage amortized over 25 years, with semi-annual compounding and monthly payments. Option A is a 5-year fixed rate of 4.00%. Option B is a 5-year variable rate that starts at 3.50%, with an adjustable payment recalculated whenever the rate changes. We assume any change in the variable rate happens at the end of year 2.

The point of the table is the range. If the variable rate stays where it starts, or falls, the variable borrower pays less interest in this example. If it rises by one percentage point after two years, the variable borrower ends up paying more interest than the fixed borrower and has a higher payment for the last three years. The fixed borrower knows the answer in advance. The variable borrower does not.

Penalties are a second variable. Three months' interest on a variable balance of about $500,000 at an assumed 3.50% is $4,375, while a fixed-rate IRD could be larger or smaller depending on the lender's method and where rates are at the time.

Questions to Ask Yourself

The usual "fixed is for cautious people, variable is for risk-takers" framing is too simple. These practical questions are more useful.

Points that can favour variable

• You may sell or refinance before the term ends, and a simpler penalty matters to you.
• You have room in your budget. Could you still comfortably pay your mortgage if the rate were one or two percentage points higher?
• You can stay calm if your payment, or the interest portion of it, rises for a period.

Points that can favour fixed

• You plan to stay in the home for the whole term and want certainty about your payment.
• Your budget is tight and a payment increase would cause real strain.
• You are close to your limit under the qualifying rules, which assess uninsured mortgages at the greater of the contract rate plus 2% or 5.25%.3
• You value knowing your payment for the full term. That peace of mind has real value.

A middle option

FCAC describes hybrid or combination mortgages, which offer both fixed and variable rates. The fixed portion gives partial protection if rates rise, and the variable portion gives partial benefit if rates fall. FCAC also notes that hybrid mortgages may be harder to transfer to another lender, because each portion can have different terms.6 Ask whether a lender offers this and how it works.

The worst decision is one made without running the numbers for your own situation, including a rate-rise case. A conversation with a licensed mortgage broker, at Good Home Capital or anywhere else, can help you compare your options. If you are thinking about refinancing mid-term, ask about penalties first.