Fixed vs Variable Mortgage: What We Chose in Canada

Fixed or variable is one of the biggest decisions you’ll make when buying a home in Canada — and it’s rarely as simple as “which rate is lower today.” Here’s what we chose, why, and what I’d actually factor in if I were deciding right now.

What We Chose, and Why

We went fixed at 4.65% with First National back in 2024 — though honestly, we weren’t given a huge amount of choice in the matter. At the time, the housing market in Canada had gone through some serious swings, especially here in PEI, where prices had doubled in some areas. Combined with a Bank of Canada rate that kept moving, most of the institutions we spoke with steered us toward fixed. It made sense to us too: we wanted a payment we knew we could manage no matter what happened with rates afterward. This was actually one of the things our mortgage broker walked us through when we were weighing our options.

What Fixed vs Variable Actually Means

Fixed means you sign an agreement locking in a set interest rate for a specific period. In our case, that’s a 25-year mortgage with a 5-year fixed term at 4.65%. Once that 5-year term ends, you hit renewal — at which point you can choose fixed again (almost certainly at a different rate than before) or switch to variable. That renewal only applies to whatever principal is left on your mortgage, not the original amount.

The general rule of thumb: if you (or the market) expect interest rates to rise, fixed is typically the safer choice. If you think rates will hold steady or fall — or if your mortgage balance is small enough that a rate increase wouldn’t hit you hard — variable can be the better route.

What the Numbers Look Like Right Now (2026)

As of this year, variable rates are running roughly 0.5-0.7% cheaper than fixed. But there’s real uncertainty hanging over where things go from here. With ongoing developments in the U.S. — where a lot of economists expect rates to climb — there’s often a trickle-down effect into Canada. If inflation or employment numbers here start coming in weaker than hoped, that could push the Bank of Canada to follow suit and start raising rates again.

That’s the trade-off with variable: it’s cheaper right now, but it comes with genuine exposure if the environment shifts. Whether that’s worth it depends entirely on how much risk you’re comfortable carrying.

The Break Penalty Most People Don’t Think About

This is the part that rarely gets the attention it deserves — and it can cost you a lot more than the interest rate difference ever would.

If you break your mortgage early (moving, refinancing, a life change), your lender charges a prepayment penalty. How that penalty is calculated depends entirely on whether you’re in a variable or fixed mortgage, and the gap between the two is bigger than most people expect.

Breaking a variable mortgage is straightforward: the penalty is typically three months’ interest on your remaining balance. On a $600,000 mortgage, that generally works out to somewhere around $4,000-$5,000 — predictable, and easy to estimate ahead of time.

Breaking a fixed mortgage is a different story. Lenders charge whichever is greater: three months’ interest, or the Interest Rate Differential (IRD) — a calculation based on the gap between your locked-in rate and current market rates, applied across your remaining balance and time left on your term. When rates have dropped since you signed, that gap can be significant. On a $600,000 mortgage broken two or three years into a 5-year fixed term, the IRD penalty can commonly land anywhere from $12,000 to $28,000 — sometimes more at the Big 6 banks specifically, since they tend to anchor the calculation to their posted (not discounted) rates.

The practical takeaway: if there’s any real chance you might not keep your mortgage for the full term — a move, a refinance, a change in circumstances — that penalty structure deserves a seat at the table when you’re choosing fixed vs variable, not just the headline interest rate. And if you’re ever actually considering breaking your mortgage, always get a written payout statement from your lender first. Never assume the number — get the real figure before deciding anything.

Our Risk Tolerance, and How We’d Decide Today

For that first 5-year term, I still lean toward fixed. It gives you an exact number to plan your life around, at exactly the point when your mortgage payment is at its highest relative to your income and life stage. The renewal after that is where the real debate starts — if variable is meaningfully cheaper at that point, it’s worth considering. But right now, with the level of uncertainty still hanging over global economies, I don’t think the gap is wide enough to justify giving up that certainty. Knowing exactly what you’re paying matters, especially if headlines start turning the way they did during COVID.

What I’d Tell Anyone Choosing Right Now

It really does come down to your own situation. For your first few years as a homeowner, I think fixed is the safer way to get your footing. If you can comfortably absorb a 0.75-1.0% swing without it wrecking your budget, variable isn’t a bad choice either — the Bank of Canada typically moves in 0.25% increments, not sudden jumps.

But it’s worth remembering: in 2022, rates went from near 0% to around 5% within about a year. A lot of people got caught out by that. Interestingly, many of the people who locked in fixed rates back then are now hitting renewal and facing a real payment jump — but it still would have been worse for them on variable, where they’d have felt that increase immediately rather than years later.

So: know the risk you’re actually willing to take, build in a safety buffer either way, and don’t forget to factor the break penalty into the decision — not just the rate on the page.

Cheers for reading!

Alex.

This post reflects our personal experience and isn’t financial advice. Rates, penalties, and lender policies vary — always confirm current numbers with a licensed mortgage professional before making a decision.