Fixed or variable at mortgage renewal: how to decide in Canada

At renewal, choose a fixed rate if a predictable payment matters more to you than a possibly lower average cost, and you are unlikely to break the mortgage before the term ends. Choose a variable rate only if you can absorb a payment at least two percentage points higher than today's, and value the smaller penalty (usually three months' interest) that variable mortgages carry. The rate gap on the day you sign matters less than these two questions, because nobody knows where rates will go over five years.

This guide is part of the mortgage renewal rates overview. Rates below are illustrative examples.

The three products you will be offered

Lender names vary, so ask directly: "If prime rises by 1%, does my payment change, or does more of it go to interest?" The answer tells you which variable product it is.

A fourth option, a hybrid or combination mortgage, splits the balance into a fixed part and a variable part. It reduces the swing in either direction, but each part may have its own penalty and maturity.

Compounding: why the rates are not quite comparable

Most Canadian fixed-rate mortgages compound semi-annually, because the Interest Act requires fixed rates to be stated as calculated yearly or half-yearly, not in advance. Many variable mortgages compound monthly. At 4.5%, semi-annual compounding gives an effective annual rate of about 4.55%; monthly compounding gives about 4.59%. The difference is small but explains why a variable payment can look slightly high for its rate.

Worked example: stress-testing a variable offer

Illustrative figures: balance $400,000 at maturity, 20 years of amortization left.

• Fixed five-year offer: 4.39%, payment $2,498.41 (semi-annual compounding)
• Variable offer: prime minus 0.75%, equal to 4.20% today, payment $2,466.28 on an adjustable-rate mortgage (monthly compounding)

The variable payment is $32.13 a month lower today. Now test a rise of 2 percentage points to 6.20%:

• Adjustable payment at 6.20%: $2,912.07, which is $445.79 more than today and $413.66 more than the fixed payment

Ask yourself whether you could pay about $2,900 a month for a year without missing other bills. If not, the variable option may still be cheaper on average, but it is not the right risk for you. Use the renewal payment calculator to test your own balance at a higher rate.

Rates can also fall. If prime fell by 1 point, the same adjustable payment would drop. A fixed rate does not give you that benefit unless you break the mortgage, which costs a penalty.

The penalty difference

The penalty is often the deciding factor for people who might move, separate, sell or refinance during the term.

• On a variable mortgage, three months' interest on $400,000 at 4.20% is $400,000 x 4.20% / 4 = $4,200.
• On a fixed mortgage at 4.39%, three months' interest is $400,000 x 4.39% / 4 = $4,390, but you pay the IRD if it is higher. If rates have dropped since you signed, an IRD can be several times larger.

See prepayment penalties and the IRD for how the IRD is calculated and why methods differ between lenders.

Fixed-payment variable mortgages and the trigger rate

If you choose a VRM, find out what happens when rates rise far enough that the payment no longer covers the interest. This is the trigger rate. Some lenders raise the payment at that point, some let the balance grow for a while, and all of them reset the payment to the remaining amortization at renewal. Households who took VRMs before the 2022 to 2023 rate rises learned this at their renewals. Read the fixed-payment variable reset before choosing this product.

Converting later

Many variable mortgages let you convert to a fixed term with the same lender without a penalty, usually to a term at least as long as the time left. The conversion is at the lender's rate on that day, which may not be a discounted rate. Ask for this in writing before you sign.

Decision checklist

• I can afford the variable payment at 2 percentage points higher for at least a year
• I have an emergency fund of several months of expenses
• I know whether the variable offer is adjustable or fixed-payment
• I know the fixed offer's penalty method and roughly what an IRD could be
• I know how likely I am to sell, move or refinance during the term
• I know whether the variable mortgage can be converted to fixed without a penalty
• I have compared both offers over the same term and amortization

If you tick fewer than five of these, a fixed rate or a shorter fixed term is usually the safer choice.

When to get advice

A licensed mortgage broker or your lender's mortgage specialist can show you penalty quotes and conversion terms side by side. If your income varies (self-employed, commission, seasonal work) or you plan a major life change, talk this through before signing.

The rate type works together with the term you choose; see choosing a renewal term. For why variable spreads and fixed rates move differently, see what determines your renewal rate.

Frequently asked questions

Is variable always cheaper over time?

No. Variable rates have often been lower on average over long periods in the past, but there have been terms where fixed borrowers paid less. Past patterns are not a promise, and the outcome depends on rate moves during your specific term.

Can I switch from variable to fixed at renewal?

Yes. At maturity you can choose any product your lender, or a new lender, offers. You do not pay a penalty at maturity.

What spread should I expect on a variable renewal?

There is no standard figure. Spreads change with market conditions. Compare the spread from your lender with written offers from other lenders on the same day.

Do variable mortgages compound monthly?

Many do, but check your mortgage disclosure statement, which must state how interest is calculated and compounded.

Sources

• Financial Consumer Agency of Canada — fixed and variable mortgages, prepayment penalties
• Bank of Canada — policy rate decisions that move prime rates
• Justice Laws Website — the Interest Act rules on stating mortgage rates
• Office of the Superintendent of Financial Institutions — guidance on mortgage underwriting and negative amortization