When you are deciding whether to get either of these mortgages, it is important to understand the benefits and risks of each decision before you finalize anything. It is also a good idea to keep in mind the refinancing penalties if you decide that is something you need to do.
Difference Between Fixed and Variable
When it comes to your mortgage interest, there are a couple of differences between fixed and variable rates. Fixed interest rates are locked in, meaning that your interest and principal payments don’t change over the mortgage term. This term is usually around 5 years, but it may vary depending on the lender you use.
A variable mortgage is a bit different. While variable rates are usually slightly lower than fixed rates, they fluctuate throughout the mortgage term. They change with the bank’s prime rates. This is where you are taking a slight risk and should do some research before locking in a variable-rate mortgage. While rates can go down with a variable mortgage, they can also go up. This means the payment you originally agreed to will change depending on the current prime rate.
Fixed Rate Mortgages Vs. Historical Variable Rate Mortgages
Choosing between a fixed-rate and variable-rate mortgage can be a very difficult decision. To choose the best one for you, you need to look beyond the numbers in front of you. You also need to look at the long term.
| Interest | Positives | Negatives |
| Fixed | With a fixed-rate mortgage, your payment stays the same throughout the term you sign for. This means that you don’t have to worry about your payment changing. | You may be paying substantially more for a fixed term than for a variable term. |
| Variable | With a variable mortgage, you often end up paying much less interest over the full term of your mortgage. This is usually over a 25-year term. | Your short-term payments could be much higher if prime rates increase significantly. |
Overall, there are benefits to both types of mortgages. What you choose to do depends on current rates, your financial situation, and the current state of the economy.
Current Fixed Rate Mortgages Vs. Current Variable Rate Mortgages
While historically, fixed mortgage rates have ended up costing more than variable-rate mortgages, the current difference between fixed and variable rates is minimal. At most, it’s only about half a percentage point. This, paired with the fact that prime rates are still increasing to combat current inflation, may make it better to get a fixed-rate mortgage.
That being said, you are only locked in for a term, likely only 3 to 5 years. Once it is time to refinance, you can always change from fixed to variable. If, at any point, you decide to go with a variable-rate mortgage or already have one, you should check with your lender to confirm whether you can lock in your variable rate at all. If so, now (2022) may be the time to do that.
Locking in Variable Mortgage Rates
With some mortgage lenders, you can lock in your variable rate at any point during the term. You may want to do this if there is a significant increase in prime rates with no relief in sight. You may also want to consider this option if payments are approaching a point where they could become unaffordable.
With the current rise in inflation and interest rates, many homeowners are choosing to refinance or lock in their variable-rate mortgages. This is because rising interest rates are making variable mortgages unaffordable for some people. Variable rates don’t usually change as drastically as they currently are, which is why locking them in may be a good idea. At this point, there is no known time when prime rates will reduce, but it doesn’t look like it will be this year (2022). While there is normally a few percentage-point difference between variable- and fixed-rate mortgages, currently the difference is only half a percentage point or less.
How Payments on Variable Mortgages Work
Depending on the lender that you use, there are two ways that variable mortgage payments can work. The first way is that your mortgage payments fluctuate with the current interest rates. This means there is no locked-in amount. If you can afford it, variable mortgages can save you money over time, but it depends on current rates relative to fixed rates and whether it makes the most sense.
Some other lenders allow you to get a variable mortgage where payments stay the same, but interest-to-principal ratios will change as the interest rate changes. The way this works is your monthly mortgage payments won’t change unless your interest payments end up costing more than the set payment. Only then will it increase.
Fluctuation of Variable Rate Mortgages
With a variable-interest-rate mortgage, it is difficult to determine when interest rates and payments will change. It could be monthly, every 6 months or even annually. It all really depends on when the prime interest rates fluctuate. An example of a variable interest rate is (prime plus 1%). Say you signed for your mortgage when the initial interest rate was 2%, since the prime rate was 1%. A year later, interest rates rose, and the prime rate is now 2%. That 2% you started with is now 3%,
Variable mortgages can also work the other way around, though. If the prime drops from 1% to 0.8%, your interest rate drops to 1.8%. These fluctuations are what have, historically, made variable interest rates much cheaper than prime rates. Whether interest rates rise or fall, they tend to even out over time.
Canadians with Variable Rate Mortgages
The number of Canadians with variable-rate mortgages fluctuates with the state of the Canadian economy. Before 2020, only around 20% of Canadian mortgages were variable. From the start of the pandemic through mid 2021, around 50% of Canadian mortgages issued were variable. With interest rates continuing to rise, mortgage payments will steadily become more expensive for many Canadian homeowners.
Switching from a Variable Mortgage to a Fixed Mortgage
In short, yes, you can convert your mortgage from fixed to variable. With such a large increase in interest rates, many Canadians are looking to do this before their mortgages become unaffordable. Currently, prime rates are at 3.75% and are expected to rise next month and continue into 2022.
The first option when it comes to locking in your interest rate or switching from a variable mortgage is to convert it into a fixed mortgage. To do this, contact your current mortgage lender. That being said, doing this will lock you in for the remainder of your mortgage at current fixed interest rates. For example, if you are 3 years into a 5-year term, you will need to lock in the interest rate for 2 years. However, because you are using the same lender, there will likely be no penalty.
The second choice you have is to refinance for another term. Doing this allows you to shop around for the best rates with a different lender. It does mean, however, that you will have to pay a penalty for ending your mortgage early. There are often some other fees involved with refinancing a mortgage. You may not even get a better rate and still have to pay a penalty.
Lastly, you can always just wait it out. In some cases, it may still be worth keeping your variable mortgage rather than locking in a fixed rate or refinancing. It just depends on whether you can afford the payments and whether it will be cheaper in the long run. It also depends on where you are in the mortgage term and how much remains on your mortgage balance. All of these numbers will make a huge difference in your decision.
Open and Closed Mortgages
When choosing a fixed or variable mortgage, another factor that can make a difference is whether the mortgage is closed or open. An open mortgage allows you to put money down on the principal whenever you want. With a closed mortgage, you can only put a certain amount toward the principal per year without penalty.
Another distinguishing feature between an open and closed mortgage is when you can refinance. Whether your mortgage is fixed or variable, an open mortgage allows you to refinance at any time without a penalty. While the interest rates tend to be a little higher with an open mortgage, refinancing at any time can end up saving you money when interest rates start to rise. A closed mortgage typically has a lower interest rate, but there will be a penalty if you refinance early.
Have Fixed or Variable Rates Performed Better Historically in Canada?
Historically, between fixed and variable mortgages, variable mortgages have saved borrowers money 85% to 90% of the time. Since variable rates can often fluctuate, lenders typically offer them at a discount. That said, there are often short-term rate spikes.
Locking in a Variable Rate Mid-Term
When you lock in a variable-rate mortgage mid-term, you’re converting your variable rate, which can change based on the central bank’s prime rate, into a fixed-rate mortgage. This fixed rate is also based on the lender’s prime rate.
Many borrowers choose to do this because fixed rates provide stability, as your mortgage payments remain the same. Since many variable-rate mortgages don’t have predictable payments, a fixed rate can provide that certainty. If Canada’s overnight rate is expected to rise, converting to a fixed rate could be a great option.
Trigger Rates and When They Apply
Tigger rates are specific to variable-rate mortgages and are the interest rates at which your regular mortgage payment only covers the interest charges. As per your mortgage contract, you don’t make mortgage principal payments when interest rates rise significantly. When this happens, it’s also referred to as negative amortization since you end up increasing your total debt.
Penalty Calculations for Fixed Vs Variable Rates
If you’re breaking your variable or fixed mortgage with a lump sum payment or paying it off in full, there is going to be some sort of penalty. This is usually the greater of three months’ interest, an interest rate differential for a fixed-rate mortgage, or a straightforward penalty of 3 months’ interest for a variable-rate mortgage. Some also refer to these as prepayment penalties. You will usually incur this, unless you have prepayment privileges on your mortgage.
Should First-Time Home Buyers Choose Fixed or Variable Rates in 2026
Based on the current benchmark rate, it’s recommended that first-time homebuyers choose fixed-rate mortgages to better manage risk. However, if rates fall, you won’t be able to take advantage of market conditions like you would with a variable mortgage.
How Hybrid Mortgages Work
With a hybrid mortgage, you can take advantage of the features of both types of mortgages without having to choose between a fixed or variable rate. It splits your total loan into distinct fixed and variable portions. Some even offer an initial fixed-rate period that later converts to a variable rate.
The idea behind this is that your rate remains stable, allowing you to avoid any rate increases that come with high inflation. However, you can take advantage of potential savings by still being able to take advantage of rate drops, meaning you can still get lower rates. This will be in effect for the entire term of the loan, but not for the entire amortization period.
Open Vs Closed Variable Rate Mortgages
Whether your variable-rate mortgage is open or closed makes a big difference, especially when the Bank of Canada starts moving the overnight rate. When interest rates fall, variable-rate mortgages will allow you to take advantage of the significantly lower interest payments. However, with an open mortgage, you can make lump sum payments and switch your mortgage types wherever you choose.
How Bank of Canada Rates Affect Each Type of Mortgage
With a fixed-rate mortgage, even when interest rates change, you pay the same amount every month until your term is up. However, for a variable-rate mortgage, your interest payments would change.
Variable Payment: One of the key differences from fixed mortgages is that variable payments are typically lower when the rate is lower. However, they also increase when the rate increases.
Fixed Payment: Most lenders also offer fixed payments, which means your principal and interest will change as rates fluctuate, but your actual payment never changes.
Differences Between Prime Rate and Discount to Prime
Whether you’re getting investment advice or looking at getting a mortgage, the prime rate of a bank matters. This is why it’s important to know the difference between the prime rate and the discount to prime.
Simply put, the prime rate is the base rate that most banks charge their creditworthy customers. A discount to prime is either a promotional or negotiated rate that is offered to borrowers on loans or variable-rate mortgages.
Switching from Variable to Fixed Mid-Term
While you can switch to a fixed rate mid-term if you choose to, you will likely have to pay a penalty. Most lenders will also require that you sign a new term. The penalty if you have a closed mortgage is 3 months of interest.
Variable Rate Caps and Floors at Canadian Banks
The caps and floors on a variable-rate mortgage are based on your bank. While these aren’t specifically listed, they will be given to you when you look into giving a mortgage.
