Fixed vs variable rate고정 금리와 변동 금리

What is the difference?

A fixed rate does not change during the term, so your payment stays the same. When the term ends, a new rate is set for the next term.

A variable rate is set as the lender’s prime rate plus or minus a fixed spread, written like “prime minus 0.5%”. When prime goes up or down, your rate follows.

A fixed rate removes the worry of rising rates but usually starts higher; a variable rate usually starts lower but can rise. Nobody can know in advance which one will cost less in the end.

Side by side

What does a variable rate follow?

The Bank of Canada sets its policy interest rate (the target for the overnight rate) on eight fixed dates a year. The Bank explains that this rate affects other borrowing rates, including the prime rate of commercial banks, which is used for loans such as mortgages and lines of credit.

So when the policy rate changes, banks usually change their prime rates by a similar amount, and variable mortgage rates move with them. On October 28, 2026 the Bank raised the policy rate by 0.25 percentage points to 2.50%; the next announcement date is December 9, 2026. Each bank sets its own prime rate, so check the bank’s website.

Fixed rates are often said to follow bond-market rates more than the policy rate, so a Bank of Canada cut does not always bring fixed rates down with it.

Two kinds of variable: variable payments or fixed payments

The Bank of Canada says about three-quarters of variable-rate mortgages in Canada have fixed payments. Which kind you get depends on the lender, so ask before you sign.

• Variable rate with variable payments (often called an adjustable-rate mortgage): when prime rises, your next payment goes up right away; when it falls, the payment goes down. The principal is paid down on schedule.
• Variable rate with fixed payments: the payment stays the same for the term, but when rates rise, more of it goes to interest and less to principal; when rates fall, the reverse. The payment does not change, but how fast the debt shrinks does.

The trigger rate and the trigger point

On a variable mortgage with fixed payments, if rates keep rising you reach a rate where the whole payment goes to interest and none to principal. The Bank of Canada calls this the trigger rate and notes that each borrower’s trigger rate is written in their mortgage contract.

Above the trigger rate, the interest is more than the payment. What happens next depends on the contract. Some lenders raise the payment right away; others add the shortfall to the balance up to a limit (the debt then grows each month, called negative amortization). The point where you must raise your payment is the trigger point, also set out in the contract.

In the Bank of Canada’s example, a mortgage with a 30-year amortization started at 1.5% had a trigger rate of 4.2%. Check your own trigger rate, and what your lender does when you reach it, in your contract and with the lender.

The penalties are different

Paying off or breaking a mortgage during the term costs a prepayment penalty. For a variable rate it is usually 3 months’ interest. For a fixed rate it is usually the greater of 3 months’ interest or the interest rate differential (IRD: the interest the lender loses for the rest of the term because today’s rates are lower than yours). If rates have fallen a lot, an IRD penalty can be very large. The exact formula differs by contract, so check it.

One legal cap exists. Under the federal Interest Act, when an individual’s mortgage has a term longer than five years, paying it out after five years cannot cost more than three months’ extra interest. Section 18 of Ontario’s Mortgages Act says the same. For terms of five years or less this rule does not apply, and the contract governs.

Mixing the two: hybrids

Some lenders sell a hybrid (combination) mortgage split into two parts, one fixed and one variable. It spreads your rate risk, but if the two parts have different terms, renewing or switching lenders can get complicated.

Many variable-rate contracts let you convert to a fixed rate during the term without a penalty (this is common, not a rule, and it varies by contract). The rate you get is the lender’s fixed rate at that time. Check the conditions in your contract.

How to choose

• Do not choose by predicting rates. Even the Bank of Canada does not fix its next decision in advance. Work out what a 2-percentage-point rise would do to your payment (or to your principal paydown), and if that is still fine, a variable rate may suit you.
• If you might sell or refinance (replace your mortgage with a new one) within a few years, the product with the smaller penalty (usually variable) can be the better fit.
• If your household needs the same payment every month, a fixed rate is simpler. A fixed-payment variable mortgage also keeps the payment level, but you need to understand the trigger rate and the jump in payments that can come at renewal.
• The stress test is the same either way: the greater of your contract rate plus 2% or 5.25%. A lower variable rate can raise your limit a little, but borrowing to the limit will hurt if rates rise.
• Ask these questions: are the payments fixed or variable, what is my trigger rate, what is the penalty formula, and can I convert to a fixed rate?

Example