Updated: April 2025  |  bremo.io financial guides

Fixed vs Variable Mortgage in Canada 2025

The choice between a fixed and variable mortgage rate is one of the most consequential decisions in a Canadian home purchase. There's no universally correct answer — the right choice depends on your financial situation, risk tolerance, and how you think interest rates will move. This guide breaks down what you need to know.

How Fixed Mortgages Work

With a fixed-rate mortgage, your interest rate stays the same for the entire term (commonly 5 years in Canada). Your payment amount doesn't change. You know exactly what you'll pay each month from the day you sign until renewal.

Fixed rates are typically set based on Government of Canada bond yields, particularly the 5-year bond. When bond yields rise, fixed mortgage rates usually follow.

How Variable Mortgages Work

A variable-rate mortgage is tied to your lender's prime rate, which moves with the Bank of Canada's overnight rate. When the Bank of Canada raises or lowers rates, your variable mortgage rate changes — usually within days.

Variable mortgages come in two forms:

• Adjustable-rate mortgage (ARM): Your payment amount changes when rates change. More rate goes to interest when rates rise; more to principal when they fall.
• Variable-rate mortgage with fixed payment: Your payment stays the same, but the portion going to interest vs. principal adjusts. If rates rise significantly, you can hit a "trigger rate" where your payment no longer covers the interest.

Key Comparison

The Historical Record

Research by mortgage economist Moshe Milevsky and others has consistently shown that, over long periods, variable-rate mortgage holders have paid less interest than fixed-rate holders about 80-90% of the time in Canada. This is because short-term rates (which drive variable mortgages) tend to be lower than long-term rates on average.

However, 2022-2023 demonstrated the risk: the Bank of Canada raised rates from 0.25% to 5.0% in a short period, causing significant payment increases for variable borrowers. Those who had taken variable rates in 2020-2021 at near-zero rates saw their payments rise substantially.

Breaking Your Mortgage: The Penalty Difference

This is often the most important practical consideration. If you need to sell your home or refinance before your term ends:

Fixed-Rate Break Penalty

Banks calculate the Interest Rate Differential (IRD), which is typically several months to over a year of interest. On a $500,000 mortgage, breaking a fixed-rate early with a big bank can cost $15,000 to $30,000 or more. Monoline lenders often have more borrower-friendly IRD calculations.

Variable-Rate Break Penalty

The penalty is almost always 3 months of interest. On a $500,000 mortgage at 5%, that's roughly $6,250. Much more predictable and typically lower than fixed penalties.

Which Is Better in 2025?

As of 2025, the Bank of Canada had begun cutting rates from their 2023 highs. Variable rates have become more attractive relative to fixed as the rate environment shifted. Fixed rates are still appealing for buyers who want certainty and aren't willing to track rate movements.

General guidance:

• Choose fixed if: you have a tight budget and need payment certainty, you're risk-averse, or you plan to stay in the home for the full term
• Choose variable if: you have financial cushion to absorb payment increases, you might need to break the mortgage early, or you believe rates will fall during your term

Hybrid Mortgages

Some lenders offer split mortgages — part fixed, part variable. This provides partial protection from rate increases while still benefiting from variable rate movement. It's a middle-ground option worth asking your lender or broker about.