Fixed vs. Variable Rate Mortgages: What’s the Right Choice for You?
When you’re shopping for a mortgage, one of the decisions you’ll face is whether to choose a fixed or variable (also known as adjustable) interest rate. Each comes with its own benefits, risks, and impact on your monthly payments and long-term financial goals.
In this post, we’ll walk you through the key differences between fixed and variable rate mortgages, including how each works, examples, and what happens if you need to break your mortgage early.
Note: The mortgages discussed here are closed mortgages, which is the most common choice for Canadians due to their lower interest rates compared to open mortgages.
🧾 Understanding Mortgage Payments
No matter your payment frequency—monthly, biweekly, or weekly—your mortgage payment will typically consist of two components:
Principal (P): The original loan amount
Interest (I): The cost of borrowing the funds
These are combined into what’s known as a blended payment or P & I—meaning each payment covers both interest and a portion of the principal.
🔄 Variable (Adjustable) Rate Mortgages
Variable rate mortgages usually start with lower interest rates than fixed rate options. However, they come with the possibility that your interest rate will rise or fall over time. These fluctuations are tied to the Prime rate, which is influenced by the Bank of Canada’s policy interest rate.
How It Works:
You’re offered a rate like “Prime minus 1.00%.” While your discount remains fixed for the term, the Prime rate can change, and therefore, so will your mortgage rate and possibly your monthly payment.
Example (Based on a $400,000 mortgage over 25 years):
Term: 5 years
Rate: Prime – 1.00%
Current Prime Rate: 3.70% → Effective rate = 2.70%
Monthly Payment: $1,831.95
If Prime increases to 4.70%, your rate becomes 3.70% →
New Monthly Payment: $1,986.54
If Prime decreases to 3.45%, your rate becomes 2.45% →
New Monthly Payment: $1,781.92
Types of Variable Mortgages:
Adjustable Rate Mortgages: Payments change as Prime changes.
Capped or Static Payment Variables: Payments stay the same, but how much goes to interest vs. principal adjusts. If rates rise too high, your payment may no longer cover the interest, triggering lender action.
Convertibility:
If rising rates make you uncomfortable, many lenders allow you to lock into a fixed rate without penalty during your term.
How Often Can Prime Change?
The Bank of Canada reviews the policy rate eight times per year. While small changes (0.25%) are common, we’ve seen larger amounts during inflationary periods. Economic uncertainty, inflation, recessions, global events, and market conditions all influence rate changes.
📘 Learn more about the Bank of Canada’s policy interest rate
🔒 Fixed Rate Mortgages
With a fixed rate mortgage, your interest rate—and your payment amount—stay the same for the full term of your mortgage, regardless of market changes. This gives you predictability and peace of mind.
Common Term:
5-Year Fixed is the most popular
Terms available from 6 months to 10 years
Example (Same $400,000 mortgage, 25-year amortization):
Term: 5 years
Rate: 5.04% (Fixed)
Monthly Payment: $2,335.54
Payment stays the same throughout the 5-year term
💡 Note: Fixed rate mortgages with major banks often come with higher penalties for breaking early.
💥 Penalties: Breaking Your Mortgage
Closed mortgages offer lower rates, but they come with penalties if you break your mortgage before your term ends.
Variable Rate Penalty:
Always 3 months’ interest
Typically less than 1% of your mortgage balance- but this can all depend on the interest rate used in the calculation.
Simple to calculate and usually more affordable
Fixed Rate Penalty:
The higher of:
3 months’ interest, or
Interest Rate Differential (IRD)
Calculated using the difference between your rate and the current rate for a term of similar length
With the major bank it will often includes the discount from the posted rate you originally received.
Can range from 3–5% of your balance, depending on the lender, term remaining, and interest rates at the time of breaking.
⚠️ Beware of “low-rate” products with extra fine print and restrictions not covered in this general overview.
✅ Which Option Is Right for You?
Here’s a quick comparison:
| Feature | Fixed Rate | Variable Rate |
|---|---|---|
| Payment Stability | ✅ High | ❌ Changes with Prime |
| Initial Interest Rate | ❌ Higher | ✅ Lower |
| Potential to Save on Interest | ❌ Limited | ✅ Yes (if rates drop) |
| Penalty to Break | ❌ Can be high (IRD) | ✅ Lower (3 months’ interest) |
| Convert to Fixed | N/A | ✅ Often allowed |
| Best For | Budget-conscious, stability seekers | Flexible budgets, rate watchers |
🏁 Final Thoughts
There’s no one-size-fits-all when it comes to choosing between fixed and variable rate mortgages. It comes down to your financial comfort level, risk tolerance, and long-term goals.
📞 Have questions? Ready to talk through your options? Reach out—we’re just a message away.
At Mortgage Sisters West, we’re here to guide you through the numbers, talk through your preferences, and help you find the mortgage that truly fits your life.
We serve all of Alberta, with a focus on our local Edmonton, Sherwood Park, St. Albert, Fort Saskatchewan, Spruce Grove, Stony Plain, Beaumont, Leduc and surrounding areas!
We are franchised with our National Brokerage Mortgage Architects and can broker your mortgage in other provinces as well. We would love to work with you!
