Most fixed-versus-variable advice is a rate forecast in disguise: go variable because "rates are coming down," or fixed because "rates are going up." Your whole decision rides on a prediction nobody makes reliably. There is a better way: run the dollars. What does each option cost per month, what does it cost to get out early, and what happens to your budget if rates move against you.
Take a concrete example: a $450,000 mortgage, 25-year amortization, 5-year term. Sample rates: 5-year fixed at 4.64%, 5-year variable at 3.95% (lender prime at 4.95% minus a 1.00% discount).
That $174 is the fixed-rate premium: the monthly price of certainty. Over the five-year term it adds up to about $10,440 in payments. And because the variable rate starts lower, more of every payment goes to principal: after five years, the variable borrower has paid down roughly $4,700 more of the balance, assuming the rate never moves. Total interest over the term tells the same story: about $98,500 on the fixed versus about $83,400 on the variable, a gap of roughly $15,100.
The rule of thumb for the rest of this article: on a $450,000 mortgage with 25 years remaining, every full percentage point of rate is worth roughly $250 a month. (Check it: at 3.95% the payment is $2,363; at 4.95% it is $2,618.) Every Bank of Canada decision moves your variable cost by roughly this math.
A variable rate is quoted as prime plus or minus a discount, for example "prime minus 1.00%." The lender's prime rate follows the Bank of Canada's policy rate, which is set on eight scheduled announcement dates each year. When the Bank cuts, variable rates usually drop within days. When it hikes, they climb just as fast. Your discount off prime is locked for the term; prime itself is not.
There are two kinds of variable mortgages in Canada, and the distinction matters:
A concrete stress scenario: you take variable at 3.95%, and a year later your rate is 4.95%. On an adjustable-rate mortgage your payment jumps from $2,363 to about $2,609, an extra $246 a month or $2,952 a year. On a static-payment mortgage your payment does not move, but your amortization stretches beyond 25 years, which means more interest over the life of the loan. Neither outcome is catastrophic on its own. The danger is stacking: two or three points of hikes turns that $250-per-point math into $500 to $750 a month.
This is the part most rate comparisons skip, and it is often where the real money hides.
Break a variable-rate mortgage mid-term and the penalty is always three months' interest. On a balance of roughly $439,000 at 3.95%, that works out to about $4,340. Simple, capped, predictable.
Break a fixed-rate mortgage and the penalty is the greater of three months' interest or the interest rate differential, the IRD. Three months' interest on $450,000 at 4.64% is $5,220. The IRD is roughly your contract rate minus the lender's current comparable rate, times your balance, times the years left in your term. If rates have fallen 1.5% since you locked in, the rough math is 0.015 x $450,000 x 4 years = $27,000. Every lender computes the IRD differently, and the Big 5 banks' posted-rate formulas are famously expensive, so treat that figure as a sense of scale rather than a quote. The point stands: breaking a fixed mortgage can easily cost five or six times what breaking a variable costs.
When does this matter? Any time you might not finish the term: a job relocation, an upsizing, a separation, refinancing to consolidate debt. If any of those are plausible in the next five years, the variable penalty cap is cheap insurance, and it can outweigh a small rate advantage in the other direction.
Two footnotes. First, porting: most lenders let you carry your mortgage to a new property and dodge the penalty, but the sale and purchase usually must close within 30 to 90 days, with the same lender and a similar balance. Second, most variable mortgages let you convert to a fixed rate mid-term at no charge, an exit ramp if rates run against you.
Forget forecasting. Answer these four questions instead, in order.
The payment shock test. Using the $250-per-point rule: if your rate rose two points tomorrow, could you handle an extra $500 a month? If the answer is "comfortably" or "tight but fine," variable is on the table. If the answer is "that would break us," take the fixed rate and stop reading. No rate discount is worth risking your home.
Your odds of breaking the term. Be honest about the next five years. Likely to move, upsize, or refinance? The variable penalty cap (about $4,340 in our example) versus a potential five-figure IRD makes variable the rational pick even if the starting rates were identical. Certain you will stay put? Then the penalty gap matters less.
Your read on rates, weighted lightly. If you believe rates are headed down, variable captures every cut automatically, while fixed leaves you paying yesterday's rate. If you believe rates are headed up, fixed locks in today's price. Weight this one lightly: it is a guess, and questions 1 and 2 are facts about your life.
The sleep test. If the thought of checking Bank of Canada announcements makes your stomach turn, the fixed rate is worth the premium. Peace of mind has a dollar value, and for plenty of people it is exactly $174 a month.
One caveat from history: a well-known Canadian study found variable beat fixed roughly 90% of the time over several decades, but most of that period was falling rates. Context, not a promise.
Variable starts about $174 a month cheaper on a $450,000 mortgage and caps your exit penalty at three months' interest, but every Bank of Canada decision can move your cost. Fixed charges a monthly premium and punishes early exits with IRD penalties, but your payment never changes. Run the payment shock test, be honest about whether you will finish the term, and let those two answers choose for you.
If you are heading into a renewal, compare your offer against the rates other Canadians are actually getting on fiveyear.ca.