A fixed mortgage locks your rate for the term, so your payment stays the same; a variable mortgage moves with your lender’s prime rate. Neha Joneja, Mortgage Agent Level 2 in Brampton, helps buyers and homeowners compare payment stability, prepayment penalties and flexibility, so the choice fits your budget and plans rather than a rate forecast.
It’s one of the first questions Neha hears, from first-time buyers in Bram West and from homeowners in Springdale opening their renewal letter: should I go fixed or variable? The follow-up is almost always, “Which way are rates heading?”
Nobody can promise that. What you can control is understanding how each option behaves when rates move, what it costs to break each one, and how much payment movement your household can handle. That’s what this guide covers, with no predictions.
Key takeaways
- A fixed rate keeps your rate and payment the same for the term; a variable rate is tied to your lender’s prime rate and changes when prime changes.
- Variable mortgages come in two forms: adjustable payment (your payment changes) and static payment (your payment stays the same, but the interest and principal split shifts).
- Breaking a variable mortgage usually costs three months’ interest; breaking a fixed one costs the greater of three months’ interest or the interest rate differential, which can be much larger.
- You pass the same stress test either way.
- The right choice depends on your budget, your plans for the next few years and your comfort with change.
How does a fixed-rate mortgage work?
With a fixed rate, your interest rate is set for the whole term, commonly anywhere from one to five years, with longer terms available from some lenders. Your regular payment doesn’t change during that term, even if rates in the wider market rise or fall.
The trade-off is flexibility. If you break the mortgage early, the prepayment penalty is usually the greater of three months’ interest or the interest rate differential (IRD), explained below. At the end of the term, you renew at whatever rates are available then.
How does a variable-rate mortgage work?
A variable rate is expressed as your lender’s prime rate plus or minus a set amount. Each lender sets its own prime rate, which generally moves when the Bank of Canada changes its policy rate. Your discount or premium from prime stays fixed for the term; prime is the part that moves.
How that movement reaches your bank account depends on which kind of variable mortgage you have.
Adjustable-rate: your payment changes
With an adjustable-rate mortgage, your payment is recalculated when prime changes. If prime goes up, your payment goes up; if it goes down, your payment drops. Your amortization (the total time to pay off the mortgage) stays on track, but your monthly budget has to absorb the changes.
Variable with a static payment: your payment stays the same
Some lenders keep your payment fixed even though the rate floats. When prime rises, more of each payment goes to interest and less to principal, so you pay down the balance more slowly. When prime falls, more goes to principal. Your budget is steady, but your effective amortization can stretch.
What is a trigger rate?
On a static-payment variable mortgage, there is a point where the rate climbs high enough that your entire payment only covers interest. That rate is your trigger rate. For example, if your payment is $2,500 a month, the trigger rate is the rate at which a month’s interest on your balance reaches $2,500.
Past the trigger rate, unpaid interest can be added to your balance. Lenders also set a trigger point, typically tied to how far the balance has grown, at which they’ll ask you to raise your payment, make a lump-sum payment or convert to a fixed rate. Each lender handles this differently, so ask for both numbers in writing before you sign.
What does it cost to break a fixed or variable mortgage?
This is the part people overlook, and in Brampton it comes up often: families upsize, sell to move closer to the Kitchener GO line, or refinance to add a legal basement apartment.
Three months’ interest is simple math. On a $500,000 balance, every percentage point of your rate is about $5,000 a year in interest, or about $1,250 for three months.
The interest rate differential compares your rate with the rate the lender could charge today for the time left on your term. As a simplified example, if that difference is 1.5 percentage points on a $500,000 balance with three years left, the IRD is roughly 1.5% × $500,000 × 3 = $22,500. Real calculations vary by lender, and some use posted rates in a way that makes the penalty larger.
That gap is why anyone who might move or refinance within a few years should weigh penalties, not just the rate. Portability (taking your mortgage to a new home) can reduce the hit, but lender rules differ.
Approval subject to lender criteria (O.A.C.). Rates subject to change. Examples are for illustration only.
Fixed vs variable at a glance
| Feature | Fixed | Variable, adjustable payment | Variable, static payment |
|---|---|---|---|
| Rate during the term | Locked | Moves with prime | Moves with prime |
| Regular payment | Same | Changes with prime | Same |
| When rates rise | No change | Payment rises | Less goes to principal |
| When rates fall | No change | Payment drops | More goes to principal |
| Typical penalty to break | Greater of 3 months’ interest or IRD | Usually 3 months’ interest | Usually 3 months’ interest |
| Trigger rate risk | None | None | Yes |
Who does a fixed rate tend to suit?
- Households whose budget has little room for a higher payment, including first-time buyers who qualified close to their limits.
- Multi-generational or co-buyer households splitting costs, where a predictable number makes sharing easier.
- People who plan to keep the home and the mortgage for the full term.
Who does a variable rate tend to suit?
- Borrowers with room in their monthly budget to absorb a payment increase.
- People who may sell, refinance or switch before the term ends and want a smaller, more predictable penalty.
- Borrowers who plan to make lump-sum prepayments and want flexibility.
Does the stress test treat fixed and variable differently?
No. The stress test is the minimum qualifying rate lenders use to check you could still afford payments if rates rose. Whichever you choose, you qualify at the greater of your contract rate plus 2% or 5.25%.
At renewal, a straight switch to a new lender with the same balance and amortization generally doesn’t require you to re-qualify at the stress-test rate. That gives you room to compare fixed and variable options with other lenders at mortgage renewal instead of signing your current lender’s offer by default. The switching lenders guide explains the steps.
What should you ask before choosing?
- How exactly is the prepayment penalty calculated, and does the IRD use posted or discounted rates?
- Is this variable mortgage adjustable-payment or static-payment?
- If static, what’s my trigger rate, what’s the trigger point, and what happens when I reach it?
- Can I convert from variable to fixed mid-term without a penalty, and which terms can I convert to?
- Is the mortgage portable if I sell and buy another home?
- What are my prepayment privileges each year, both lump sums and payment increases?
- Is it registered as a standard or collateral charge, and how does that affect switching at renewal?
If you’re buying, these questions belong in the conversation before you waive conditions. The home purchase mortgage page covers how the rest of the process fits together, and you can book a consultation to run your own numbers.
Mortgage payment calculator
For illustration only. Not a rate quote or an approval.
Approval subject to lender criteria (O.A.C.). Rates subject to change. Figures are estimates for illustration only.
Frequently asked questions
Is a fixed or variable mortgage better right now?
There’s no answer that’s right for everyone, and no one can reliably predict rates. A better question is how much payment change your budget can absorb and whether you might break the mortgage early. Those two answers usually point clearly in one direction.
Can I switch from a variable to a fixed rate later?
Many variable mortgages let you convert to a fixed term without a penalty, usually to a term at least as long as the time left. You get the lender’s fixed rate on the day you convert. Check the conversion rules in your commitment before choosing.
What happens if my variable rate reaches the trigger rate?
Your full payment goes to interest and none to principal. If rates keep rising, unpaid interest may be added to your balance until you hit the lender’s trigger point, when you’ll typically be asked to increase payments, make a lump sum or convert to fixed.
Why is breaking a fixed mortgage so much more expensive?
Fixed penalties are the greater of three months’ interest or the interest rate differential. When rates have dropped since you signed, the IRD can be many times larger than three months’ interest, because it covers the lender’s lost interest for the rest of your term.