Choosing between a fixed and variable mortgage rate is a big decision that impacts your budget and financial plans. Here’s a quick breakdown to help you decide:
- Fixed Rates: Stable monthly payments, no surprises. Ideal for those who value predictability.
- Example: A 5-year fixed rate as of June 24, 2025, is 3.91%.
- Variable Rates: Payments can fluctuate with market changes. Potential for lower costs over time but comes with risk.
- Example: A 5-year variable rate is currently 4.05%.
Quick Comparison
| Factor | Fixed Rate | Variable Rate |
|---|---|---|
| Monthly Payments | Stays consistent | Can change with market rates |
| Interest Rate | Locked in for the term | Adjusts with the prime rate |
| Breaking Penalty | High (Interest Rate Differential) | Low (3 months’ interest) |
| Flexibility | Limited | Can switch to fixed without penalty |
| Risk | Low | Higher, depends on market conditions |
Key Takeaways:
- Fixed rates are great for stability and peace of mind.
- Variable rates often save money long-term but require flexibility.
- Current market trends show variable rates slightly higher than fixed, which is unusual.
- Experts predict rates may drop later in 2025, favouring variable rates.
Assess your risk tolerance, use mortgage calculators, and consult a professional to make the best choice for your financial goals.
Fixed Vs Variable Rate Mortgage in 2025
Fixed Mortgage Rates: Same Payment Every Month
A fixed mortgage rate offers stability by locking in your interest rate for the entire term. This means your monthly payments stay the same, regardless of economic changes. Here’s a closer look at how these rates work in Canada.
How Fixed Mortgage Rates Work in Canada
When you choose a fixed rate, your lender sets the interest rate at the beginning of your term, and it remains unchanged until it’s time to renew [8]. These rates are influenced by bond yields with matching terms [8]. Typically, lenders add 1% to 2% to the bond yield to account for risk and profit margins [8]. Here’s a snapshot of recent trends in bond yields and their spreads:
Recent Fixed Rate Spreads in Canada
| Month | 5-Year Fixed Mortgage Rate | 5-Year Bond Yield | Spread |
|---|---|---|---|
| June 2025 | 4.36% | 2.91% | 1.45% |
| May 2025 | 4.30% | 2.82% | 1.48% |
| April 2025 | 4.25% | 2.72% | 1.53% |
| March 2025 | 4.37% | 2.66% | 1.71% |
| February 2025 | 4.63% | 2.75% | 1.88% |
| January 2025 | 4.76% | 3.00% | 1.76% |
Many Canadians prefer 5-year fixed terms for the payment consistency they provide [8].
Fixed Rate Pros and Cons
The biggest draw of fixed mortgage rates is their stability. As TD Canada Trust explains:
“Fixed rate mortgages are excellent for people who like stability in their mortgage interest rate and monthly payments because of the predictability it offers.” [5]
This predictability makes budgeting simpler, allowing homeowners to manage other financial priorities with confidence. Marsharee Lindsay, a Financial Advisor at ACU‘s Pembina branch, echoes this sentiment:
“A fixed mortgage rate is stable for the entire term. It’s predictable. There are a lot of members who appreciate budgeting for the same amount every month. That peace of mind can be valuable.” [7]
However, fixed rates aren’t without downsides. If interest rates drop, homeowners with fixed-rate mortgages could end up paying more than those with variable rates. Historically, fixed-rate mortgages have also tended to cost more over the long term [6][11]. Another drawback is the steep penalties for breaking a fixed-rate mortgage, which can run into thousands of dollars – much higher than penalties for variable-rate mortgages [3].
Fixed Rate Rules in Canada
Fixed-rate mortgages in Canada come with specific rules that influence their flexibility and cost. For instance, breaking a fixed-rate mortgage can lead to significant penalties [3].
Additionally, the impact of interest rate changes is more pronounced with longer amortization periods [11]. Even a small difference in interest rates can add up over time, so it’s crucial to understand the terms and rates you’re being offered [9].
Variable Mortgage Rates: Payments That Change
Unlike fixed-rate mortgages that keep your payments steady, variable-rate mortgages adjust based on market conditions, leading to fluctuating monthly payments. These rates move in tandem with your lender’s prime rate, which can work in your favour – or against you – depending on the economy.
How Variable Mortgage Rates Are Set
Variable rates are directly tied to the lender’s prime rate, which is influenced by the Bank of Canada‘s overnight lending rate decisions [13][10]. When the Bank of Canada adjusts its overnight rate, lenders typically follow suit by changing their prime rates by the same amount [13].
For example, as of June 24, 2025, Canada’s prime rate is 4.95%, while the Bank of Canada’s overnight rate sits at 2.75% [17]. Between June 2024 and March 2025, the Bank of Canada reduced its benchmark rate by 225 basis points, down from a peak of 5% [17].
Your final mortgage rate is calculated by adding a lender-specific margin to the prime rate [13]. For instance, if your lender offers “prime minus 0.5%” and the prime rate is 4.95%, your mortgage rate would be 4.45%.
Rate adjustments usually occur in increments of 0.25% to 0.50% [18][19]. Understanding these shifts is key to evaluating whether a variable rate fits your financial goals.
Variable Rate Pros and Cons
Variable rates come with both upsides and risks. On the plus side, they often start lower than fixed rates, offer flexibility, and allow you to switch to a fixed rate without steep penalties. However, they also bring the uncertainty of fluctuating payments and higher interest costs if rates rise [16][15].
Historically, variable rates have been advantageous. Between 1950 and 2000, Canadian homeowners would have saved money with a variable mortgage nearly 90% of the time [3]. Dan Eisner, CEO of True North Mortgage, highlights this benefit:
“If you’re doing the mortgage and tariff math – a variable rate has the potential to save you the most. A homeowner can always switch to a fixed rate, penalty-free, if they get nervous.” [1]
That said, the unpredictability of variable rates is a major drawback. For example, during ten rate hikes between July 2021 and September 2023, variable-rate mortgage holders paid 63% more in total interest compared to those with fixed rates [10].
To manage this uncertainty, many lenders now allow borrowers to switch to fixed rates without penalties if they feel uneasy about market fluctuations [17][18][19]. Other strategies include making lump-sum payments or increasing regular payments to pay down the mortgage faster [19].
What Affects Variable Rates in Canada
Variable rates are shaped by more than just lender margins; they’re also influenced by broader economic factors. The Bank of Canada bases its rate decisions on three main indicators: inflation, employment, and economic growth [9][12][13]. The central bank aims for 2% inflation, as this level supports price stability and a well-functioning economy [14].
Economic growth plays a big role too. Strong growth often leads to higher interest rates, while slower growth results in lower rates [9]. Currently, economists anticipate further rate cuts. Sal Guatieri, senior economist at BMO Capital Markets, shares his outlook:
“We think inflation will probably stay pretty close to where it is now, which is close to the Central Bank’s 2% target for this year and next year, and… the Bank of Canada will likely resume cutting interest rates after pausing in April… We do expect it to resume cutting rates in June, and to cut rates [a total of] three times this year.” [12]
Global factors, particularly those in the United States, also play a role. When the U.S. Federal Reserve adjusts rates, it often pressures the Bank of Canada to act similarly to maintain currency stability and economic competitiveness [9][12].
Ron Butler of Butler Mortgage offers his take on the current market:
“With the rates having crept over 4%, we have almost dead certainty that variable rates will continue to drop at some point – whether it’s on June 4 or the end of July, variable cuts will start again.” [12]
For those considering variable rates, experts suggest staying informed about rate trends and Bank of Canada updates [20]. Building a financial plan can help you prepare for potential payment increases, and working with a mortgage broker can uncover the best rates and strategies for managing market changes [20]. Aligning your mortgage choice with your financial goals is essential in navigating these shifts.
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Fixed vs Variable: Side-by-Side Comparison
Let’s break down the differences between fixed and variable mortgage rates. This comparison helps clarify how each option can shape your monthly payments and overall financial picture.
Fixed vs Variable Rate Comparison Chart
Here’s a quick look at the main distinctions between fixed and variable rates:
| Factor | Fixed Rate | Variable Rate |
|---|---|---|
| Monthly Payments | Stay consistent throughout the term [22] | Payments can change as rates fluctuate [22] |
| Interest Rate | Locked in for the entire term [27] | Adjusts based on the prime rate [27] |
| Breaking Penalty | Higher, often calculated using the Interest Rate Differential (IRD) [25] | Lower, usually three months’ interest [24] |
| Financial Planning | Predictable and easier to budget [2] | Requires flexibility to manage potential changes [2] |
| Rate Protection | Shields you from rate increases [2] | Exposed to rate changes [2] |
| Initial Rate | Typically higher than variable rates [21] | Generally starts lower than fixed rates [21] |
| Flexibility | Limited repayment flexibility [23] | Offers more options for early repayment [23] |
“A fixed rate mortgage offers a set interest rate and monthly payments for the chosen term of the loan. This type of mortgage is ideal for borrowers who prefer stability and predictability in their financial planning.” [22]
On the other hand, True North Mortgage outlines the appeal of variable rates:
“Variable rate mortgages are popular with our clients who can handle a certain amount of risk and prefer to be aggressive in maximizing their savings.” [21]
Interestingly, a CIBC study revealed that in 88% of cases, opting for a variable rate mortgage proved more cost-effective than choosing a fixed rate [21].
Payment Examples for $500,000 Mortgages
Here are some real-world scenarios to highlight the financial impact of these choices:
Tom’s Fixed Rate Penalty
Tom has a $100,000 fixed-rate mortgage at 5.75%, with three years left on his term. Breaking his mortgage incurs a $3,750 penalty. After switching to a 3.99% rate, Tom saves $1,350 overall [26].
Alex’s Larger Fixed Rate Impact
Alex, with a $600,000 fixed-rate mortgage under the same conditions, faces a much steeper penalty of $22,500. Despite this, switching to a 3.99% rate still results in savings of $8,099 [26].
Nancy’s Variable Rate Advantage
Nancy’s $500,000 variable-rate mortgage at 5.75% comes with a much lower penalty of $7,103 (three months’ interest). After shifting to a 3.99% rate, Nancy enjoys net savings of $18,395 – substantially better than Alex’s scenario [26].
However, during the 10 rate hikes between July 2021 and September 2023, variable-rate mortgage holders paid 63% more in interest than fixed-rate holders. On average, this added up to $23,579 more in total interest [10].
Currently, around 60% of borrowers opt for a 5-year fixed-rate mortgage, while about 30% choose a 5-year variable rate [21]. These examples underscore how the choice between fixed and variable rates can significantly impact your financial outcomes.
How to Choose Between Fixed and Variable Rates
Choosing between fixed and variable mortgage rates isn’t just about crunching numbers – it’s about aligning your financial situation, comfort level, and future plans with the right option. Here’s how to approach this decision.
Understand Your Risk Tolerance and Financial Goals
Your choice of mortgage rate should reflect your financial circumstances and how much risk you’re willing to take on. Fixed rates are perfect for those who need predictable payments, such as first-time buyers on a tight budget or anyone worried about rising interest rates. On the other hand, variable rates might appeal to seasoned investors or those with flexible budgets who are comfortable with some risk and hope to benefit from potential rate drops [28][30].
If you’re considering a variable rate, it’s wise to build a savings buffer to handle any potential rate increases [29]. This cushion can help you manage payment fluctuations. And remember, you’re not locked in forever – you can switch from a variable to a fixed rate later if you want more stability [29].
Once you’ve assessed your risk tolerance, it’s time to dive into the numbers using Canadian mortgage tools.
Leverage Canadian Mortgage Tools and Calculators
Mortgage calculators are invaluable for translating your financial considerations into concrete numbers. These tools can help you compare different rate options and understand how they’ll affect your budget.
- Ratehub.ca‘s Mortgage Payment Calculator: Helps estimate payments, closing costs, and monthly expenses. You can also adjust variables like your down payment and payment frequency [33].
- MortgageCalculator.org: Offers a Canadian mortgage comparison calculator to estimate payments and compare fees across scenarios [31].
- True North Mortgage’s Compare & Save Calculator: Highlights potential savings from lower rates, showing both interest saved and additional principal paid down [32].
- Superbrokers.ca‘s Rate Comparison Chart: Provides daily updated rates from various Canadian lenders [34].
When using these tools, don’t just focus on monthly payments. Consider the total mortgage amount, interest rate, amortization period, payment type, and any associated fees [31]. Look for calculators that display the Annual Percentage Rate (APR), which includes fees for a clearer comparison [31]. Also, check for prepayment privileges and potential penalties, as these can significantly influence your overall costs [32].
Factor in Canada’s Economic Landscape
Economic conditions and market trends play a big role in deciding between fixed and variable rates. For example, as of June 4, 2025, the Bank of Canada maintained its benchmark overnight rate at 2.75% [33]. These trends often influence borrower preferences.
In 2022, nearly half of new mortgages were variable-rate, but by late 2023, that figure dropped to just 6% as interest rates climbed [28]. Meanwhile, fixed-rate mortgages with terms of 3 to 5 years became the most popular choice, making up over 50% of new mortgages by mid-2024 [28].
The housing market also provides context. In May 2025, Canadian home sales rose by 3.6% month-over-month, with the national average home price at $691,299 – a 1.8% drop compared to May 2024 [33]. Predictions of lower interest rates into 2025 have shifted demand toward shorter fixed-term mortgages [28]. If you’re looking for predictable payments but want flexibility to take advantage of lower rates in the future, a shorter-term fixed mortgage could be a smart option [28].
“If you’re doing the mortgage and tariff math – a variable rate has the potential to save you the most. A homeowner can always switch to a fixed rate, penalty-free, if they get nervous.” – Dan Eisner, True North Mortgage Founder and CEO [1]
Finally, consulting a mortgage expert can be invaluable. They can help you interpret the current market and tailor a mortgage solution to your financial goals and risk tolerance [28].
Conclusion: Pick the Right Mortgage Rate for You
Selecting the right mortgage rate is all about finding the balance between stable payments and potential long-term savings. Fixed rates provide the reassurance of predictable monthly payments, making them a great option for first-time homebuyers with tight budgets or anyone who values consistency in their finances. On the other hand, variable rates often offer opportunities for savings over time, especially in favourable market conditions [1].
In today’s market, these differences are even more pronounced. With the Bank of Canada’s policy rate sitting at 2.75% and variable rates projected to dip further [4], many borrowers are leaning towards variable-rate mortgages. For instance, data from True North Mortgage in April 2025 shows that 32% of clients opted for variable rates, compared to 26% who chose fixed rates [1]. Additionally, variable rates tend to be 0.25% to 1.0% lower than fixed rates, which can result in noticeable savings over the life of the loan [1].
The good news? Your initial choice isn’t set in stone. Variable-rate mortgages often allow you to switch to a fixed rate without penalties if market conditions shift. If you’re comfortable managing payment fluctuations and have a financial cushion for potential rate increases, a variable rate could help you save more. However, if steady payments are a priority, a fixed rate offers stability and eliminates the need to constantly track market trends.
Ultimately, this decision boils down to balancing stability with flexibility. Assess your risk tolerance, use Canadian mortgage tools like calculators to explore your options, and factor in the country’s economic outlook. Consulting with a mortgage advisor can also provide tailored guidance to match your budget and long-term goals [35]. By carefully considering these elements, you can choose the mortgage rate that aligns with your financial needs and aspirations.
FAQs
What are the differences between fixed and variable mortgage rates, and how do they affect financial planning in Canada?
Fixed mortgage rates offer consistent monthly payments and safeguard against rising interest rates. This makes them a solid option for anyone who values financial stability and prefers predictable budgeting. They’re especially helpful for long-term planning, such as saving for retirement or managing regular household expenses.
Variable rates, however, typically start lower and adjust according to market conditions. This means you could save money if rates drop, but there’s also the risk of higher payments if rates climb. This type of mortgage is better suited for those who are comfortable with some level of risk and are aiming to benefit from potential cost reductions over time.
The choice between these two options boils down to your comfort with risk, the current state of the market, and your financial objectives. If stability is your priority, a fixed rate might be the better fit. If you’re open to some uncertainty for the chance to save, a variable rate could be more appealing.
How do I choose between a fixed and variable mortgage rate in Canada?
When deciding between a fixed and variable mortgage rate in Canada, your choice should align with your financial circumstances, comfort with risk, and future plans. A fixed rate offers consistent monthly payments, providing peace of mind and shielding you from potential interest rate hikes. This option is ideal if you value stability or want to lock in your costs over the long term.
In contrast, a variable rate often starts lower than a fixed rate, which can lead to savings if interest rates decline. However, it comes with the uncertainty of changing payments, which might not suit everyone.
Key considerations include your income reliability, how long you intend to stay in your home, and the current economic outlook. If you’re wary of rising rates or prefer financial predictability, a fixed rate might be the safer bet. On the other hand, if you’re open to some risk and want the chance to save on interest, a variable rate could be a smart choice. Be sure to evaluate how potential rate changes could affect your budget and overall financial goals before making a decision.
How can I reduce the risks of choosing a variable mortgage rate in Canada?
To manage the risks that come with a variable mortgage rate, there are a few practical steps you can take. For instance, you might want to apply for a rate cap or consider switching to a fixed rate if the market starts to look unpredictable. These choices can help keep your monthly payments from rising too much.
Another smart move is building a financial cushion. By paying off other debts and setting aside savings for unexpected expenses, you can create a safety net in case interest rates climb. Staying on top of market trends and regularly reviewing your mortgage terms can also ensure that your plan continues to align with your financial goals.
Sticking to a disciplined repayment strategy and preparing for rate changes will make it easier to handle the ups and downs of a variable mortgage.