Fixed vs Variable Mortgage in Canada: How to Decide (2026)
With the Bank of Canada at 2.25% and five-year fixed rates near 4.5%, a variable at prime minus 0.9% starts $255 a month cheaper on $500,000.
As of September 2026 the Bank of Canada's policy rate is 2.25%, prime is 4.45%, and a competitive variable rate around prime minus 0.9% (3.55%) is about a point below a competitive five-year fixed near 4.5%. On $500,000 over 25 years that is $2,510 a month variable against $2,765 fixed. The variable wins if prime stays flat or falls; one full point of increases erases the advantage, and two points cost $160 a month more than the fixed. Choose by how much of that you can absorb, not by guessing the direction.
Figures come from the CostToClose mortgage payment calculator. Rates cited are illustrative market rates on the date shown; your offer will differ.
The payment under different paths
$500,000, 25 years, five-year term:
| Scenario | Rate | Monthly payment | vs fixed |
|---|---|---|---|
| Five-year fixed | 4.49% | $2,765 | — |
| Variable today (prime − 0.90%) | 3.55% | $2,510 | −$255 |
| Variable if prime rises 1.00% | 4.55% | $2,781 | +$16 |
| Variable if prime rises 1.50% | 5.05% | $2,922 | +$157 |
| Variable if prime falls 0.50% | 3.05% | ≈ $2,380 | −$385 |
Run through the CostToClose calculator, 14 September 2026.
Over a five-year term, a variable that averages anything below about 4.5% beats the fixed. The Bank of Canada has held at 2.25% since October 2025 after cutting from 5.00%; the bond market, which drives fixed rates, has not priced further cuts, which is why the gap is as wide as it is.
What each one actually is
Fixed
The rate and payment are locked for the term. The lender prices it off the Government of Canada five-year bond yield plus a spread. Breaking it early costs the greater of three months' interest and the interest rate differential, which can be large.
Variable
The rate is prime plus or minus a discount and moves the day the Bank of Canada moves. Two forms: adjustable, where the payment changes with the rate, and fixed-payment variable, where the payment stays constant and the split between interest and principal shifts, with a trigger rate at which the payment no longer covers interest. Breaking a variable costs three months' interest only, and most lenders let you convert to a fixed at any time without penalty.
A framework instead of a forecast
- Can you carry the variable at prime + 1.5%? Run the payment at 5.05%. If that number would strain the budget, take the fixed and stop reading forecasts.
- How long will you hold this mortgage? If a move, sale or refinance within five years is plausible, the variable's three-month penalty against a fixed IRD is worth real money, often $5,000 to $15,000.
- Would you sleep? Variable-rate borrowers in 2022 saw payments rise 40% in a year. Some were fine; some were not. The right answer depends on the borrower, not the market.
- Hybrid: split the mortgage half fixed, half variable. Two rates, two penalties, half the exposure.
Worked example from the calculator
Couple with $150,000 income, $500,000 mortgage, planning to stay ten years:
| Metric | Fixed 4.49% | Variable prime − 0.9% |
|---|---|---|
| Payment today | $2,765 | $2,510 |
| Payment if prime +1.5% | $2,765 | $2,922 |
| Payment as share of net income (≈ $9,000/mo) | 31% | 28% today, 32% at +1.5% |
| Penalty if they break in year 2 ($480,000 balance) | ≈ $5,000–$14,000 (IRD) | ≈ $4,260 (3 months) |
Both fit. The variable saves $3,060 a year at today's rate and costs $1,890 a year in the bad case; for a ten-year holder with room in the budget, that asymmetry usually favours the variable. For a buyer at the edge of qualification, it does not. Reproduce this.
What changes the number
- The discount off prime. Prime − 1.0% versus prime − 0.6% is $100 a month on this mortgage.
- Term length. Three-year fixed rates are often below five-year; a shorter fixed is a middle path.
- Stress test. Both are qualified at contract + 2%, so the variable's lower rate also qualifies you for slightly more.
- Conversion rights. A variable that can convert to a fixed at the lender's posted rate is worth less than one that converts at the discounted rate; read the fine print.
Frequently asked questions
Is a fixed or variable mortgage better in 2026?
Neither is better in the abstract. Variables are about a point cheaper today; fixed rates cost more for certainty. Choose by whether you can carry the variable at prime plus 1.5% and how long you will hold the mortgage.
What is prime rate in Canada right now?
4.45% at the major banks as of September 2026, with the Bank of Canada policy rate at 2.25%.
Can I switch from variable to fixed?
Usually yes, at any time without penalty, but at the lender's rate for the remaining term — often a posted rate, not a discounted one. Confirm before signing.
What is the penalty for breaking a variable mortgage?
Three months' interest. Breaking a fixed is the greater of three months' interest and the interest rate differential, which is often much larger.
What is a trigger rate?
On a fixed-payment variable, the rate at which the payment no longer covers the interest. Past it, the balance grows or the lender raises the payment. See Are trigger rates still a risk?.
Sources
- Bank of Canada, policy interest rate (2.25%, held 2 September 2026) — checked 14 Sept 2026
- Bank of Canada, prime rate and conventional mortgage rate series — checked 14 Sept 2026
- Financial Consumer Agency of Canada, fixed and variable interest rate mortgages — checked 14 Sept 2026
- OSFI Guideline B-20, qualifying rate — checked 14 Sept 2026
This is general information for Canadian home buyers and sellers, checked against the sources listed above on the date shown, and it is not legal, tax, or mortgage advice. Rules and rates change, so confirm current figures with your lawyer or notary, your lender, or the government office that administers the tax before relying on them.