Variable vs Fixed Rate Mortgage in Canada, 2026: What Actually Differs
Short answer
What it costs to leave matters more than the rate type: on one hypothetical $500,000 fixed mortgage, the wording of the prepayment clause alone makes the break penalty $6,250, $15,000 or $30,000. A fixed rate holds your rate and payment for the term, and a variable rate moves with your lender's prime rate. Fixed may be worth its premium if a higher payment would strain you, and variable may deserve a look if you could absorb increases. Either way, read the prepayment charge before the rate.
Key takeaways
- One hypothetical $500,000 fixed mortgage costs $6,250, $15,000 or $30,000 to break, depending on how the contract words the penalty.
- Don't assume variable means three months' interest. Check the prepayment charges line in your own contract.
- When the Bank of Canada moves its rate, variable follows through prime. Fixed doesn't have to. The policy rate is 2.25% as of October 12, 2026.
- "Variable" covers two payment types. One changes with the rate; the other stays level until a trigger point.
- The uninsured stress test adds 2% to the contract rate, with a 5.25% floor, whichever type you pick.
This page is part of the Ontario mortgage renewal guide.
Leaving early: where fixed and variable really differ
People sell, move for work and refinance. If any of that could happen before your term ends, the penalty clause will matter more to you than a quarter point of rate.
On a closed mortgage, the penalty is usually the higher of two amounts: three months' interest on what you still owe, or the interest rate differential (IRD). Lenders usually use the IRD when your rate is higher than the current rate and you signed less than five years ago (FCAC, prepayment penalties).
An IRD measures the gap between your rate and a current rate for the time you have left. A fixed rate signed before rates fell is exactly that gap. Here's what it does to one mortgage.
Hypothetical example, not a client result
The same closed fixed mortgage, three possible penalties
Inputs: $500,000 still owing, closed 5-year fixed rate of 5.00%, 36 months left in the term. The rates are invented for the arithmetic and aren't current offers.
- Three months' interest: $500,000 × 5.00% × 3 ÷ 12 = $6,250
- IRD, comparison rate 4.00% (the lender's current posted rate for a 36-month term): $500,000 × (5.00% − 4.00%) × 36 ÷ 12 = $15,000
- IRD, comparison rate 3.00% (that posted rate minus a 1.00-point discount you were given at signing): $500,000 × (5.00% − 3.00%) × 36 ÷ 12 = $30,000
The lender charges the higher of three months' interest and its IRD. So this one mortgage costs $6,250, $15,000 or $30,000 to break, and the only thing that changed is the wording of the penalty clause.
Assumptions: the simplified method that reproduces FCAC's published example ($200,000 at 6% with 36 months left and a 4% comparison rate gives $3,000 and $12,000). A lender works from the interest left to pay on your term under its own contract formula, so its figure will differ. Administration, discharge and other fees aren't included.
Both comparison rates in the example are on FCAC's list of methods a lender may use. So two lenders can quote you the same fixed rate and charge very different amounts to leave. The mortgage penalty guide goes deeper on the calculation, and the fair-penalty lender comparison covers comparing lenders on it.
Is a variable mortgage always three months' interest?
You'll see that stated as a rule. It isn't one. Some contracts use three months' interest only. Others don't: FCAC's sample disclosure box for a closed variable-rate mortgage sets the charge as "the greater of" three months' interest or the interest rate differential.
If yours is three months' interest only, the arithmetic is short. On a hypothetical $500,000 balance at 4.00%, it's $500,000 × 4.00% × 3 ÷ 12 = $5,000. To find out which you have, read the prepayment charges line in the information box at the front of the agreement. A federally regulated lender has to put it there.
Ways around the penalty
- Port it to your next home, if your lender confirms the mortgage is eligible.
- Blend-and-extend with your current lender. No prepayment penalty, though administrative fees may apply (FCAC, breaking your mortgage contract).
- Let a buyer assume it. Typically available on most fixed-rate mortgages and not on variable ones (FCAC, choosing a mortgage).
- Wait for the end of the term, when you can renew or refinance without a prepayment penalty.
Fixed vs variable at a glance
These are the four rows where the two types differ in ways that change a decision.
| Fixed rate | Variable rate | |
|---|---|---|
| Payment | Stays the same for the term. | Depends on the contract. Adjustable payments change with the rate. Fixed payments stay level until a trigger point. |
| Cost to leave a closed term early | Usually the higher of three months' interest or the interest rate differential (IRD). | Some contracts use three months' interest only; FCAC's sample variable disclosure lists the greater of that or the IRD. |
| Changing your mind mid-term | Blend-and-extend with the same lender, if offered. | Convert to fixed, if the mortgage has a convertibility feature. A fee usually applies. |
| Stress-test rate (uninsured) | Greater of contract rate plus 2% or 5.25%. | Same rule, applied to the variable contract rate. |
What moves each rate
When the Bank of Canada moves its rate, prime follows, and your variable rate follows prime. Your contract sets the rest: prime plus or minus an adjustment that doesn't change (FCAC, interest on mortgages).
2.25% as of October 12, 2026. Next announcement: October 28. The Bank lists the dates on its policy interest rate page, and mortgage rates in Canada in 2026 covers where rates sit this year.
Fixed rates follow lenders' funding costs, and the Bank is blunt that it "doesn't set mortgage rates". Early in the COVID-19 pandemic it cut its rate quickly, yet rates on new mortgages "didn't decline much, and some actually went up" (Bank of Canada, What's behind your mortgage rate). So a Bank cut isn't a fixed-rate cut. Ask how long a quoted fixed rate is held, and get the expiry date in writing.
A variable rate comes with two payment types
With adjustable payments, your payment changes when the rate changes. With fixed payments, the payment stays level and the split inside it moves: when the rate goes up, more goes to interest and less to principal. Find out which one you're being offered before you compare it with fixed.
Hypothetical example: $500,000 owing, rate rises from 4.00% to 5.00%. Interest for one month is worked as balance × rate ÷ 12, which ignores your lender's compounding method.
| Adjustable payments | Fixed payments | |
|---|---|---|
| Monthly interest at 4.00% | $1,666.67 | $1,666.67 |
| Monthly interest at 5.00% | $2,083.33 | $2,083.33 |
| What changes | Your payment rises by $416.67. | Your payment stays the same. $416.67 less goes to principal. |
Fixed payments have a limit. If rates reach the trigger point in your contract, your lender may increase your payments. The variable versus adjustable rate guide shows how to tell which type you hold and how a trigger rate is worked out.
The stress test: which rate you qualify at
You don't qualify at the rate you pay. For uninsured mortgages at federally regulated lenders, the qualifying rate is "the greater of the mortgage contract rate plus 2% or 5.25%" (OSFI, minimum qualifying rate). The test starts from the contract rate, so hypothetical offers of 4.60% fixed and 4.10% variable are tested at 6.60% and 6.10%. A lower test rate doesn't make a rising payment easier to carry. The mortgage stress test guide has the rest, including renewals and insured mortgages.
Which one fits your situation
None of these rows picks a product for you. Each one names the first thing to check.
| Your situation | Check this before you compare rates |
|---|---|
| You may sell or refinance before the term ends | If you may sell in year 2 or 3, get the IRD wording in writing and price it before you look at the rate gap. Ask whether the mortgage is portable. |
| Your monthly budget is tight | Add one percentage point to the variable offer: about $83 a month in interest for every $100,000 owed. If that doesn't fit, FCAC's own guidance is that a fixed rate may be better for you. |
| Your renewal is coming | Maturity is when you can change rate type or lender without a prepayment penalty. Get both types quoted before the renewal statement arrives, not after. |
| You're self-employed and your income swings | Compare the prepayment privilege in each offer, not only the rate. It decides how much extra you can pay down in a strong quarter. Unused room typically doesn't carry into the next year. |
| You want variable now but may lock in later | Ask if the mortgage has a convertibility feature, what the fee is, and which fixed terms you can convert into. The fixed rate you get is the one offered that day. |
The $83 is plain arithmetic: $100,000 × 1% ÷ 12. On renewal timing, a federally regulated lender must send your renewal statement at least 21 days before the term ends (FCAC, renewing your mortgage). Three weeks isn't long to compare lenders. The Toronto mortgage renewal playbook and the automatic renewal guide cover that window, and the self-employed mortgage guide covers income documents.
What to get in writing before you choose
- The rate, and for variable, the formula: prime plus or minus how much.
- For variable, whether payments are adjustable or fixed, and the trigger point if they're fixed.
- The prepayment charge wording: three months' interest, IRD or the greater, and which comparison rate the IRD uses.
- The yearly lump-sum and payment-increase limits.
- Whether the mortgage is portable, assumable or convertible, and the fee for each.
- How long the quoted rate is held, and the date it expires.
To see what each offer does to your payment, use the renewal comparison calculator or the Ontario mortgage payment calculator. They compare the numbers you enter. They can't predict a variable rate.
Sources
Every rule and figure was checked on October 12, 2026 against the Bank of Canada, FCAC and OSFI pages linked in the text. Example rates are hypothetical. Penalty method: three months' interest = balance × rate × 3 ÷ 12; simplified IRD = balance × rate gap × months left ÷ 12.
Frequently asked questions
Is a fixed or variable rate mortgage better in Canada in 2026? expand_more
Neither is better by rule. Fixed holds your rate and payment for the term, which suits a budget that couldn't absorb an increase. Variable moves with your lender's prime rate, so the cost can fall or rise. Compare written offers on the same balance and amortization, then compare the prepayment charge in each contract. The cost of leaving early can outweigh the rate gap.
What is the penalty for breaking a fixed vs variable mortgage in Canada? expand_more
On a closed mortgage, the penalty is usually the higher of three months' interest on what you still owe or the interest rate differential (IRD). Lenders usually use the IRD when your rate is higher than the current rate and you signed less than five years ago. Some variable contracts use three months' interest only, but don't assume yours does: FCAC's sample disclosure for a closed variable-rate mortgage lists the greater of the two. Read the prepayment charges line in your contract and ask the lender for a written figure.
Does a Bank of Canada rate cut lower fixed mortgage rates? expand_more
Not directly. The Bank of Canada doesn't set mortgage rates. Its policy rate moves prime, and prime moves variable rates. Fixed rates depend mostly on lenders' funding costs. Early in the COVID-19 pandemic the Bank cut its rate and rates on some new mortgages went up. The policy rate was 2.25% on October 12, 2026, and the next announcement is October 28, 2026.
Can I switch from a variable rate to a fixed rate during my term? expand_more
Only if the mortgage has a convertibility feature, so ask before you sign. When you convert, you usually pay a fee, conditions may apply, and the new fixed rate may be higher than the variable rate you've been paying. Without that feature, changing rate type mid-term generally means breaking the contract and paying the prepayment penalty.
Is the mortgage stress test different for fixed and variable rates? expand_more
The rule is the same, but the result can differ. For uninsured mortgages at federally regulated lenders, the minimum qualifying rate is the greater of the contract rate plus 2% or 5.25%. The test starts from the contract rate, so the offer with the lower rate is tested at a lower rate. Qualifying for more doesn't make a larger payment affordable.
Bring both offers. Compare what each costs to leave.
Bring your mortgage statement and any written fixed or variable offers. Jenny goes through the rate, the payment type and the penalty clause with you, on the same assumptions.
Jenny Tate · Mortgage Agent Level 1 · FSRA #M22002086
Jenny Tate
Mortgage Agent Level 1 · FSRA #M22002086
Jenny Tate is a Mortgage Agent Level 1 with Tango Financial Mortgage (ON) Corporation (FSRA #13691). General information. A lender decides approval and terms.