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:

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

DimensionFixed rateVariable rate
What the rate doesStays the same for the term6May increase and decrease during the term6
Starting rateUsually higher than variable for a similar term6Usually starts lower than fixed6
Payment predictabilityPredictable for the termPayment changes with the rate (adjustable), or the split between interest and principal changes (fixed payment)
Qualifying rate (uninsured mortgages)3The greater of the contract rate plus 2% or 5.25%The greater of the contract rate plus 2% or 5.25%
Prepayment penaltyUsually the higher of three months' interest or the interest rate differential (IRD)7Set by your contract; ask the lender for the method
Portability and conversionVaries by lenderVaries by lender; ask whether conversion to a fixed rate is allowed and on what terms
Comfort levelHigh: few surprisesRequires tolerance for payment or interest movement

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.

Scenario (assumed)Monthly paymentInterest paid over 5 yearsBalance after 5 years
A: fixed at 4.00%$2,735about $96,800about $452,700
B1: variable at 3.50%, no change$2,596about $84,400about $448,700
B2: variable 3.50%, then 4.50% from year 3$2,596, then $2,859about $98,700about $453,500
B3: variable 3.50%, then 3.00% from year 3$2,596, then $2,470about $77,300about $446,100

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

Points that can favour fixed

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.

Frequently Asked Questions

Is variable always cheaper than fixed over a full 5-year term?
No. Variable rates usually start lower than fixed rates, but the total cost over a term depends on where rates go. Borrowers who held variable-rate mortgages while the Bank of Canada raised its policy rate from 0.50% in March 2022 to 5.00% in July 2023 saw their costs rise sharply. Past patterns are context, not a guarantee.
Can I switch from variable to fixed mid-term?
Some lenders allow it, and the terms vary. Ask whether your lender offers conversion, whether it applies a fee, and which fixed rate you would be given. Your mortgage contract has the answer.
What happens to my variable rate if the Bank of Canada raises rates?
With an adjustable payment, your payment changes when the rate changes. With a fixed payment on a variable rate, your payment stays the same but more of it goes to interest, and in some cases none of it pays down principal, according to the Financial Consumer Agency of Canada. Contact your lender as soon as possible if that happens.

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Sources
  1. Bank of Canada. Policy Interest Rate (checked 2026-10-07)
  2. Bank of Canada. Interest Rate Announcement, September 2, 2026 (2026-09-02)
  3. Office of the Superintendent of Financial Institutions. Minimum qualifying rate for uninsured mortgages (page modified 2026-01-29)
  4. Bank of Canada. Interest Rate Announcement, March 2, 2022 (2022-03-02)
  5. Bank of Canada. Interest Rate Announcement, July 12, 2023 (2023-07-12)
  6. Financial Consumer Agency of Canada. Choosing a mortgage that is right for you
  7. Financial Consumer Agency of Canada. Mortgage fees: Prepayment penalties
Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or mortgage advice. Mortgage qualification depends on individual circumstances including income, credit history, property type, and lender criteria. Figures in examples are illustrations based on assumed rates, not quotes. OAC. Rates subject to change. Conditions apply. Good Home Capital Inc. (FSRA Mortgage Brokerage Licence #12596) is an Ontario-licensed mortgage brokerage independently licensed and regulated by the Financial Services Regulatory Authority of Ontario. Contact us for advice specific to your situation.