Last updated: March 2025 — In early 2025, Canada's best 5-year fixed mortgage rates are approximately 4.69%–5.19%, while the best variable rates are approximately prime – 0.90% = ~6.05%. The current rate spread significantly favours fixed rates — a reversal from historic norms where variable rates were almost always cheaper. This guide analyzes what the data says and how to choose for your situation.
Current Rate Comparison (March 2025)
| Product | Best Available Rate | Monthly Payment ($500K, 25yr) |
|---|---|---|
| 5-Year Fixed (insured) | ~4.69% | ~$2,755 |
| 5-Year Fixed (uninsured) | ~4.89% | ~$2,813 |
| 3-Year Fixed | ~4.59% | ~$2,726 |
| 1-Year Fixed | ~5.19% | ~$2,928 |
| Variable Rate (best) | prime – 0.90% (~6.05%) | ~$3,202 |
| Variable Rate (typical) | prime – 0.50% (~6.45%) | ~$3,339 |
Historical Analysis: Fixed vs Variable in Canada
Academic research (including the oft-cited Milevsky 2001 study and subsequent updates) has consistently found that Canadian borrowers who chose variable rate mortgages paid less interest on average than fixed rate borrowers over 50+ years of data. The reason: variable rates follow the BoC policy rate, and the BoC rarely keeps rates high for the full 5-year fixed term.
However, this historical advantage came with significant caveats:
- 2022–2023 was a brutal exception: variable rate holders saw their rates go from 1.5% to 7.2% in 18 months
- Past performance doesn't guarantee future results — especially in unusual rate environments
- The psychological cost of payment uncertainty matters to household financial stability
Understanding the Rate Spread
The "spread" between fixed and variable rates is currently inverted (fixed is lower). This happens when:
- The BoC policy rate is high (pushing variable rates up)
- Markets expect future BoC rate cuts (pulling bond yields — and fixed rates — down in anticipation)
Essentially, the bond market has already priced in expected future cuts. Fixed rates reflect where rates are expected to be on average over 5 years, not where they are today.
Break-Even Analysis
For a 5-year variable rate mortgage to match the cost of a 5-year fixed rate mortgage, the variable rate needs to average below the fixed rate over the 5-year term. With the best fixed at 4.69% and variable at 6.05%, you'd need the variable rate to fall by approximately 1.36% over the 5-year period and average 4.69%.
Given that the BoC started 2025 at 3.0% (prime 5.45%) and is widely expected to cut further, this break-even is very plausible — but not guaranteed. If the BoC cuts to 2.50% or below (prime ~4.95%), the variable rate would be around 4.05%, well below the 4.69% fixed rate.
The 2022–2023 Variable Rate Disaster
Variable rate mortgage holders who borrowed in 2021 at prime – 1.05% (effective 1.40%) saw their rates increase to approximately 6.15% by mid-2023. Monthly payments on a $600,000 mortgage went from ~$2,350 to ~$4,000 — a $1,650/month increase. This was the largest and fastest rate increase in Canadian mortgage history and severely impacted hundreds of thousands of households.
This experience has made many Canadians understandably cautious about variable rates — even when the math currently favours fixed, it's a rational emotional response.
Who Should Choose Fixed Rate (2025)?
- Tight budget: You're borrowing the maximum you qualify for and cannot absorb any payment increase
- First-time buyers: Peace of mind during an already-stressful first year of homeownership is valuable
- Risk-averse personality: The certainty of a fixed payment is worth the potential cost difference to you
- High leverage: Less than 20% down means you're already taking on maximum risk — reduce uncertainty elsewhere
- Rate increase scenario: If geopolitical or supply shocks could re-ignite inflation, fixed provides protection
Who Should Choose Variable Rate (2025)?
- Financial flexibility: You can comfortably handle a $200–$400/month payment increase without stress
- Believes in more BoC cuts: If you're confident rates will fall significantly, variable locks in those future benefits
- Short timeline: If you expect to sell or pay off in under 3 years, variable has lower penalty costs
- Lower balance: On a $250,000 mortgage, the rate difference in absolute dollars is small
- Open to converting: Most variable mortgages can convert to fixed partway through — you get flexibility now with the option to lock in later
The 3-Year Fixed: The Current Sweet Spot?
For many borrowers in 2025, the 3-year fixed rate (approximately 4.59%) provides an interesting middle ground:
- Lower rate than 5-year fixed in most environments
- Certainty for 3 years — not forever
- Renewal in 2028 at potentially lower rates if BoC easing continues
- Lower penalties if you need to break early vs 5-year fixed
Breaking a Fixed Mortgage Early
A major disadvantage of fixed rate mortgages is the prepayment penalty for breaking early. Banks typically charge the higher of 3 months' interest or the Interest Rate Differential (IRD) — the difference between your contracted rate and the current rate for the remaining term, calculated on the outstanding balance. IRD penalties can be enormous (sometimes $20,000–$40,000) when fixed rates have fallen since you signed. Variable rate mortgages typically have maximum 3-months' interest penalty — often thousands less.
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Whether you choose fixed or variable, a larger down payment improves your rate and removes CMHC insurance premiums at 20%. KOHO earns up to 5% on savings to grow your down payment faster.
Open KOHO — Use Code 45ET55JSYAFrequently Asked Questions
Has variable always been better than fixed historically?
Based on Canadian data, variable rate borrowers have paid less interest on average in approximately 87–90% of historical 5-year periods studied. However, 2022–2023 was a major exception. Past results don't predict future outcomes, and the psychological cost of payment uncertainty is real and valid.
Can I convert variable to fixed mid-term?
Yes — most variable rate mortgages have a conversion option that lets you lock into the lender's then-current fixed rate at any time without penalty. This is a valuable option: you get the initial lower fixed rate (if the market offers it), and can convert if rates start rising unexpectedly.
What will mortgage rates be in 2026?
See our Mortgage Rate Forecast Canada 2025–2026 for a detailed analysis. The short version: if the BoC continues cutting rates toward a neutral rate of approximately 2.5%, 5-year fixed rates may stabilize around 4.25%–4.75%, while variable rates could reach 4.5%–5.0% — a meaningful improvement from current levels.
Related: Mortgage Payment Calculator | Rate Forecast 2025–2026 | Affordability Calculator