Fixed vs variable interest rates in Canada: how to choose

Fixed means your interest rate is locked for the term, so your payment is predictable. Variable means your rate moves with your lender's prime rate, which follows the Bank of Canada's policy rate, so your cost can fall or rise. Neither wins in the abstract. Fixed buys certainty. Variable buys the chance of paying less, with the risk of paying more. Which one fits depends on your budget, your timeline, and how well you sleep when rates move.

One thing up front: LoanGoose is a loan matching and comparison service, not a lender. We do not set rates, and we do not make credit decisions. What follows is how the two rate types work in Canada, so you can ask sharper questions when you compare offers.

What fixed and variable actually mean

A fixed rate stays the same for the length of your term. If you sign a five-year fixed mortgage, your interest rate does not change for five years, no matter what the Bank of Canada does. Your payment is stable, which makes budgeting straightforward.

A variable rate is tied to your lender's prime rate. When prime moves, your rate moves, usually within a few days. Depending on the product, either your payment changes or your payment stays the same and more (or less) of it goes to interest.

Variable is not only a mortgage thing. Personal loans can be fixed or variable, and a home equity line of credit is typically variable. The FCAC — personal loans page explains how lenders present these products, and FCAC — mortgages covers the mortgage-specific rules.

One Canadian detail worth knowing: fixed-rate mortgages are compounded semi-annually by law. That changes how an advertised rate turns into what you actually pay, and it is why a Canadian mortgage quote is not directly comparable to a rate quoted in another country.

What actually moves a variable rate

Your lender's prime rate is a business decision, but in practice it tracks the Bank of Canada's policy rate closely. When the Bank changes its target, prime usually follows within days. The Bank of Canada — rates page publishes the policy rate and the dates it changes, so you can see the pattern for yourself.

Variable-rate mortgages come in two main flavours. With an adjustable payment, your payment rises and falls with prime. With a fixed payment, your payment stays the same while the split between principal and interest shifts, and if rates rise enough you may hit a trigger point where the lender raises your payment anyway.

If you are on a fixed income or your budget has no slack, the adjustable version deserves real caution. A payment that can jump is a different animal from a payment that cannot.

Fixed does not mean forever

A fixed rate is fixed for your term, not for the life of the loan. A five-year fixed mortgage becomes a fresh decision in five years. If rates are higher at renewal, your payment goes up then.

Fixed is also not free to escape. If you sell, refinance, or break the mortgage early, a prepayment penalty may apply, and how it is calculated varies by lender and product. Read that part of the contract before you sign, not after. The FCAC — mortgages page walks through prepayment and renewal basics.

How lenders decide what to offer you

Your rate is not only about the market. It is about you: income, credit history, down payment, and how much of your income goes to debt. For federally regulated mortgage lenders, underwriting generally works to a total debt service ratio ceiling of about 44%, and the borrower must qualify at a stress-test rate above the contract rate, as set out in OSFI Guideline B-20.

If you are borrowing against home equity, federally regulated lenders generally limit a home equity line of credit to 65% of appraised property value, with total secured lending usually capped at 80%. Because those products are usually variable, the rate question and the how-much-can-I-borrow question arrive together.

Your credit report feeds into all of it. Canada has two national credit reporting bureaus, and a free copy of your credit report is available from each. FCAC — credit reports and scores explains how to order them and what lenders see.

The honest trade-off

Fixed usually costs you a small certainty premium in exchange for predictability. Variable gives you the upside if rates fall and the downside if they rise. Nobody knows which way rates go next. Anyone who tells you otherwise is selling something.

Variable tends to be a poor fit if your income is fixed, your emergency fund is thin, you are already near the top of your budget, or a payment increase would push you into more borrowing. Fixed tends to be a poor fit if you are likely to move or refinance soon and the prepayment penalty would wipe out the difference.

• Can my budget absorb the payment if my rate rises?
• How long am I actually keeping this loan?
• What is the prepayment penalty, and how is it calculated?
• Is the payment fixed, or does it move with prime?
• What happens at renewal?
• Is the quoted rate the rate I get after fees?

If you are looking at short-term credit instead

Some borrowers land here because a payday loan or another high-cost short-term loan is the only thing on the table. Those work differently. A payday loan is generally up to $1,500 for a term of 62 days or less, per FCAC — payday loans. Where a province operates a licensed payday lending regime, the Payday Lending Regulations, SOR/2024-114 cap the cost of borrowing at $14 per $100 advanced. A province may set a lower cap, and the lower figure applies. Quebec does not license payday lending, which effectively prohibits the model there.

Above all of this sits the Criminal Code s. 347 — criminal rate of interest: 35% per year, in force since 2025-01-01, calculated by a defined method that aggregates interest and certain charges.

Term length matters as much as rate. A lower rate stretched over a long amortization can cost more than a higher rate over a short one, so compare total cost, not just the headline number.

If something goes wrong

Complaints about federally regulated financial institutions go to the FCAC — complaints process. Most other lenders are licensed and supervised provincially, and each province has a consumer protection office, listed through FCAC — provincial and territorial regulators.

If debt is already unmanageable, only a licensed insolvency trustee can administer a consumer proposal or bankruptcy, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada. A consumer proposal stays on your credit report for three years after completion, or six years from filing, whichever comes first. A first bankruptcy stays on your credit report for six years after discharge. These are significant decisions, so talk to a licensed professional before choosing a path.

Bottom line

Choose fixed if certainty is worth more to you than the chance of a lower rate. Choose variable if your budget can absorb a jump and you are comfortable watching the Bank of Canada. Either way, compare more than the rate. Term, penalties, fees, and renewal terms all change what you actually pay.

LoanGoose is a loan matching and comparison service, not a lender. The lowest rates are only available to the most qualified applicants.