Mortgages and Property

What Is Variable vs Fixed-Rate Mortgage?

A fixed-rate mortgage locks your rate for the entire term (usually 5 years). A variable rate moves with the Bank of Canada's prime rate, potentially saving money when rates fall.

Definition

Canadian mortgages typically come in two main rate types. A fixed-rate mortgage locks your interest rate for the length of the term (most commonly 5 years). Your payment does not change with Bank of Canada rate decisions, providing certainty. A variable-rate mortgage fluctuates with your lender's prime rate, which tracks the Bank of Canada overnight rate. Variable rates often start lower than fixed rates but carry more risk if rates rise. There are two subtypes of variable mortgages: adjustable-rate (your payment changes with prime) and variable-rate (your payment stays the same, but the principal and interest split adjusts). In Canada, the most popular term is the 5-year fixed because it balances rate certainty with reasonable penalty on early exit.

Formula

Fixed payment: M = P x r(1+r)^n / ((1+r)^n - 1). Variable: payment recalculates as prime rate changes.

Example

5-year fixed at 5.2% vs 5-year variable at prime minus 0.5% (prime = 5.45%, so variable = 4.95%). Variable saves $117/month initially on a $500,000 mortgage, but if prime rises 1% the saving disappears.

Use It

Try the Canada Mortgage Calculator

Related Terms

Mortgage Stress TestThe federal rule requiring lenders to qualify borrowers at the greater of their contract rate plus 2% or the 5.25% benchmark, ensuring borrowers can handle rate increases.Mortgage Amortization in CanadaThe total period over which a mortgage is repaid. In Canada, CMHC-insured mortgages are limited to 25 years; uninsured first-time buyer mortgages may extend to 30 years.CMHC Mortgage Default InsuranceMandatory insurance required when your down payment is less than 20%, protecting the lender if you default. Provided by CMHC, Sagen, or Canada Guaranty.
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