Fixed vs variable mortgages in Canada is a different question than it is elsewhere, and the differences aren’t cosmetic. Canadian mortgage terms are short, penalties for breaking a fixed mortgage can run into five figures, and variable-rate borrowers face a mechanism — the trigger rate — that doesn’t exist in most other markets.
Here’s how the decision actually works for Canadian borrowers in 2026.
Where rates stand right now
The Bank of Canada held its policy rate at 2.25% on 15 July 2026, its sixth consecutive hold. Bank prime sits at 4.45%. The policy rate peaked at 5.00% in July 2023 before nine cuts brought it down to current levels.
| Approximate rate | |
|---|---|
| Bank of Canada policy rate | 2.25% |
| Prime rate | 4.45% |
| Best 5-year variable | ~3.40–3.45% |
| Best 5-year fixed (insured) | ~3.94–4.04% |
| 5-year fixed (uninsured, broker) | ~4.19–4.29% |
Note what that shows: variable is currently cheaper than fixed by roughly half a percentage point. That’s the reverse of the situation Canadians faced through 2023 and 2024.
Forecasts are split. TD, CIBC and BMO expect the policy rate to hold through 2026; Scotiabank and National Bank see a possible increase to 2.75% by year-end. Nobody is forecasting significant cuts. Current thinking is published by the Bank of Canada, with the next decision on 2 September 2026.
Despite variable being cheaper, fixed dominates in practice — in 2025, around 77% of rate enquiries on major comparison sites were for fixed, against roughly 8% for variable. Canadians are paying a premium for certainty, and after the 2022–2023 experience it’s easy to see why.
How the two are priced differently
This trips up more Canadians than any other detail.
Variable rates move with the Bank of Canada policy rate, through your lender’s prime rate. They’re quoted as a discount from prime — “prime minus 0.65%”, for instance, which at 4.45% prime gives you 3.80%. When the Bank moves, your rate moves within weeks.
Fixed rates don’t follow the Bank of Canada at all. They track Government of Canada bond yields for the matching term. The 5-year GoC yield has been running around 2.80–3.20%, which is what anchors current 5-year fixed pricing.
That’s why fixed rates sometimes move when the Bank does nothing, and sometimes don’t move when the Bank cuts. If a cut was already expected, bond yields priced it in months earlier.
The trigger rate: Canada’s variable-rate trap
Not all Canadian variable mortgages behave the same way, and the difference is critical.
Adjustable-rate mortgages (ARM) change your payment when rates change. Rates rise, your payment rises. Painful but transparent.
Variable-rate mortgages (VRM) keep your payment fixed and change how it’s split between interest and principal. Rates rise, more of each payment goes to interest and less to principal.
That second structure sounds gentler, and it hides a problem. If rates rise far enough, your fixed payment stops covering even the interest. That threshold is your trigger rate. Past it, unpaid interest gets added to your balance — negative amortization, where you’re paying every month and owing more.
Beyond that sits the trigger point, usually where your balance exceeds the original principal or the property value. At that stage lenders require action: a lump sum payment, a higher payment, or conversion to fixed.
Thousands of Canadian households hit these thresholds during the 2022–2023 increases, and many had no idea the mechanism existed until the letter arrived. If you’re considering variable, ask the lender directly: is this a VRM or an ARM, and what is my trigger rate?
Break penalties: the biggest structural difference
If you take one thing from this article, take this. Canadian break penalties differ enormously by mortgage type.
Breaking a variable mortgage typically costs three months’ interest. On a $500,000 balance at 3.5%, that’s roughly $4,400.
Breaking a fixed mortgage costs the greater of three months’ interest or the interest rate differential — the lender’s calculation of interest they’d lose. IRD penalties routinely run to $10,000, $20,000 or more, and different lenders calculate them very differently. Big-bank IRD calculations using posted rates rather than discounted rates tend to produce the largest penalties.
Why this matters: roughly a third of Canadians break their mortgage before the term ends — job relocation, divorce, upsizing, refinancing. If there’s a realistic chance your circumstances change within five years, the penalty difference can outweigh the rate difference entirely.
The stress test
Whichever you choose, you must qualify at the higher of 5.25% or your contract rate plus 2%.
At today’s rates, contract-plus-2% is always the binding figure. A 4.04% fixed rate means qualifying at 6.04%; a 3.45% variable means qualifying at 5.45%.
One practical consequence: because variable rates are currently lower, the variable stress test rate is lower too — which can mean qualifying for a larger mortgage on variable than fixed. Treat that as information, not encouragement. The stress test exists precisely because borrowing your maximum is rarely wise, and this is a good moment to know what improving your credit before applying could do for your rate tier.
The renewal wave
A large share of Canadian mortgages are renewing in 2026 for the first time since rates rose, and the arithmetic is uncomfortable.
Someone who signed a 5-year fixed in 2021 at 2.00–2.50% is renewing into roughly 4.00% or higher. On a $500,000 balance, that’s a payment increase of several hundred dollars a month.
If that’s you:
- Start 120 days early. Most lenders hold a rate for 120 days, so you can lock a rate and still benefit if rates fall before renewal.
- Shop beyond your current lender. Renewal offers are frequently above the best available rates, and lenders rely on people signing without comparing.
- Consider extending amortization to reduce the payment, understanding it increases total interest paid.
- Switching at renewal costs no penalty — the term has ended. This is the one moment where moving lenders is free.
So which should you choose?
Five questions do most of the work.
Could you absorb a 2% rate increase? On a $500,000 balance that’s roughly $550 a month. If the answer is no, fix — regardless of what forecasters say.
Might you break the mortgage before the term ends? If there’s a real chance, variable’s cheaper penalty structure may be worth more than any rate difference.
How stable is your income? Variable income plus a variable rate is a lot of variability in one household.
Which type of variable is on offer? If it’s a VRM, know your trigger rate before signing.
Will this genuinely stress you? The premium for fixed is currently around half a point. If that buys you sleep, it’s a legitimate purchase.
There’s also a middle route worth asking about: some lenders offer split mortgages, with part fixed and part variable. Rarely mathematically optimal, but often the version people actually stick with.
How Canada compares
United States. The 30-year fixed lets Americans lock a rate for the whole amortization with no renewal risk — a product that essentially doesn’t exist in Canada, and the single biggest structural difference between the two markets.
United Kingdom. Similar to Canada in that “fixed” means two to five years, followed by remortgaging. UK early repayment charges are generally more predictable than Canadian IRD calculations.
Australia. Variable dominates and switching lenders is easy, creating a “loyalty tax” for those who never renegotiate.
The broader framework, including how these choices work in other markets, is in our guide to fixed vs variable mortgage rates.
Frequently asked questions
Can I convert a variable mortgage to fixed mid-term?
Most Canadian lenders allow it without penalty. But you convert at whatever fixed rates are then — which is often exactly when fixing has become expensive.
Is variable cheaper right now?
Yes, by roughly half a percentage point at current pricing. Whether it stays cheaper depends on the Bank of Canada, and forecasts are split between holding and a modest increase.
What happens if I hit my trigger rate?
Unpaid interest is added to your balance. Your lender will contact you and typically require a lump sum, a payment increase, or conversion to fixed.
Does the Bank of Canada affect my existing fixed mortgage?
Not during the term. Your rate is locked until renewal. Bank decisions influence bond yields, which affect the rate you’ll be offered at renewal.
The bottom line
Variable is currently cheaper and carries far lower break costs — genuinely attractive if your budget has room and your plans might change. Fixed costs about half a point more and removes the trigger rate risk entirely.
Whatever you choose, get two things in writing before signing: whether a variable product is a VRM or an ARM with its trigger rate, and exactly how the lender calculates the break penalty. Those two documents cause more expensive surprises in Canada than the rate choice itself.
And if a payment increase would leave you without a financial buffer, that’s the more urgent problem — see our guide to building an emergency fund before stretching on a mortgage.
Sources
- Bank of Canada — the policy rate that drives variable mortgage pricing
- OSFI Guideline B-20 — the mortgage stress test requirement
- Financial Consumer Agency of Canada — prepayment penalties, IRD calculations and renewal rights
- CMHC — mortgage insurance rules and down payment requirements
Trigger rate mechanics and IRD penalty formulas vary between lenders and are set out in your own mortgage contract. Rates quoted are illustrative and move constantly.
Last reviewed: 15 August 2026. Bank of Canada rates and lender pricing change frequently — we review this article when they do.
General information only, not personalised mortgage advice. Rates are as of early August 2026 and change frequently. Penalty calculations vary significantly by lender — request yours in writing. Speak with a licensed Canadian mortgage broker or your lender about your own situation.
