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Fixed vs variable at a glance: A fixed-rate mortgage locks in your interest rate for the term so your payments never change. A variable-rate mortgage moves with your lender's prime rate, which means your payments can go up or down. Fixed rates offer predictability. Variable rates have historically been lower on average but come with more uncertainty. The right choice depends on your risk tolerance, how long you plan to stay in the home and your overall financial situation.
The mortgage rate decision is one of the most consequential financial choices you will make as a homebuyer. Both options have genuine advantages and the right answer is different for every person. This guide breaks down how each type works, what to watch out for and how to think through the decision for your specific situation.
For more on the full homebuying process, visit our mortgage hub or take a look at our complete buyer's guide.
Fixed Mortgage Rates
With a fixed mortgage rate, your interest rate and monthly payment stay the same for the entire term, regardless of what happens in the market. Your rate is locked in at the time of commitment and does not move until the term ends and you renew.
This predictability makes fixed rates appealing for buyers who want to know exactly what they are paying every month and who are not comfortable with uncertainty in their household budget.
Types of Fixed-Rate Mortgages
Closed mortgages are the most common. They typically offer lower rates but limit your ability to pay the mortgage off early. Breaking a closed fixed-rate mortgage before the term ends usually results in a penalty calculated using the Interest Rate Differential (IRD) method, which can be substantial.
Open mortgages allow you to pay off the balance at any time without penalty. This flexibility comes at a cost as the rate is typically higher than a closed mortgage.
Advantages of Fixed Rates
- Predictable payments: Your monthly payment does not change, which makes budgeting straightforward.
- Rate protection: If market rates rise during your term, your rate stays the same.
- Peace of mind: You always know what you owe each month, no matter what the Bank of Canada does.
Things to Consider
- Higher starting rate: Fixed rates are typically higher than variable rates at the time of signing.
- Break penalties: Exiting a closed fixed mortgage early can be expensive. The IRD calculation can result in penalties of several thousand dollars depending on how rates have moved since you signed.
Variable Mortgage Rates
Variable mortgage rates move with your lender's prime rate, which is influenced by Bank of Canada rate decisions. When the prime rate goes down, you pay less interest. When it goes up, you pay more. The degree of impact on your monthly payment depends on which type of variable mortgage you have.
Types of Variable-Rate Mortgages
Fixed payment variable-rate mortgages keep your monthly payment the same even as the rate moves. What changes is how much of each payment goes toward interest versus principal. If rates rise significantly, more of your payment goes to interest and less to the principal balance.
Adjustable-rate mortgages (ARMs) change your actual monthly payment when the rate moves. Your payment goes down when rates fall and up when they rise. You feel the impact directly each month.
Advantages of Variable Rates
- Potential savings: When rates fall, you benefit immediately. Historically in Canada, variable rates have tended to cost less over full mortgage cycles than fixed rates, though this varies by period.
- Lower break penalty: Breaking a variable mortgage typically costs only three months of interest, which is much less than the IRD penalty on a closed fixed mortgage.
Things to Consider
- Rate uncertainty: Your interest costs can rise if the prime rate increases, which puts pressure on your budget if you are carrying other expenses.
- Conversion costs: Switching from variable to fixed mid-term is possible but the rate you lock in may be higher than what was available when you first signed.
- Buyers who value payment predictability
- Long-term homeowners with stable budgets
- Those uncomfortable with financial uncertainty
- Rising rate environments
- Buyers comfortable with some rate risk
- Those who may need to break the mortgage early
- Buyers with financial flexibility to absorb rate moves
- Falling or stable rate environments
How to Make the Decision
There is no universally correct answer. The right choice depends on three things: your financial stability, your risk tolerance and your long-term plans for the property.
If you have a tight monthly budget with little room for payment increases, a fixed rate is the safer choice. The slightly higher rate is the cost of that certainty. If you have flexibility in your budget, a longer timeline in the home and the ability to stay calm when rates move, a variable rate has historically offered savings over full mortgage cycles.
One often-overlooked consideration is break penalties. If there is any chance you might sell or refinance before your term ends, the lower break penalty on a variable mortgage can be worth more than the rate savings alone. A large IRD penalty on a closed fixed mortgage can significantly eat into any gain from a sale or refinance.
Talk to a mortgage professional before committing. The mortgage hub on our site is a good starting point. If you are still in the early stages of buying a home in Oakville, our first-time buyer resources cover the full picture.
Still saving for your down payment?
Our guide on saving for a home in Oakville while renting covers the FHSA, the RRSP Home Buyers' Plan and practical strategies to reach your target faster.
Wondering how long the process takes?
From mortgage pre-approval to closing day, our home buying timeline guide walks through every stage so you know what to plan for.
The fixed versus variable question comes up with almost every buyer I work with. My honest take is that most people who feel strongly about one option or the other are responding to how rates have moved recently rather than thinking about their full situation. If you would lose sleep watching rates tick up each month, a fixed rate is probably worth the premium. If you have financial flexibility and the ability to absorb some movement, the historically lower cost of variable is worth serious consideration. Either way, talk to your mortgage professional with your actual numbers in front of you, not just general advice. We can connect you with trusted mortgage brokers in the Oakville area if you need a starting point.
Frequently Asked Questions
What is the main difference between a fixed and variable mortgage rate?
A fixed rate stays the same for the entire term of your mortgage regardless of what happens in the market. A variable rate moves with your lender's prime rate, which is tied to Bank of Canada decisions. Fixed means certainty. Variable means potential savings but also potential increases.
Which is better right now, fixed or variable?
It depends on the rate environment and your personal situation. In a period of falling rates, variable mortgages tend to benefit holders directly. In a rising rate environment, fixed rates protect you from the increases. A mortgage broker can help you assess current rate spreads and what makes sense for your timeline and budget. There is no single right answer.
What is the penalty for breaking a fixed mortgage early in Canada?
For a closed fixed-rate mortgage, the penalty is typically the greater of three months' interest or the Interest Rate Differential (IRD). The IRD calculation is based on the difference between your original rate and what the lender can charge today for the remaining term. In a low-rate environment, IRD penalties can be very large. This is one of the main reasons some buyers choose variable, where the break penalty is generally only three months' interest.
Can I switch from a variable to a fixed mortgage mid-term?
Yes, most lenders allow this. You can convert a variable-rate mortgage to a fixed rate during your term. The catch is that the fixed rate you lock in will be based on current market rates at the time of conversion, which may be higher than what was available when you first signed. It is worth running the numbers with your lender or broker before converting.
Does a larger down payment affect which mortgage type I should choose?
Not directly, though a larger down payment does reduce the total amount you are borrowing, which means rate fluctuations have less absolute impact on your monthly payment. It also eliminates the need for CMHC mortgage default insurance if your down payment is 20% or more, which reduces your overall borrowing cost regardless of whether you go fixed or variable.
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