With mortgages in Canada, choosing between a variable and a fixed interest rate is a key decision. How do you decide?
Most Canadian borrowers have historically preferred the steadiness of fixed rates — about 75% according to the Bank of Canada. The appeal may be in the predictable monthly payments and protection from interest rate hikes and associated stress.
But times may be changing. In recent years, variable-rate mortgages have seen a rise in popularity, especially during periods when the Bank of Canada's prime rate reached historic lows. The potential for lower payments may have tempted more homeowners to consider taking the risk of a variable rate. An estimated 2.2 million mortgages could be facing interest rate shock in 2025 when such mortgages come up for renewal.
So, does this shift in popularity mean a variable-rate mortgage is now the smarter choice? And what happens if interest rates start climbing again?
If you’re in the market for a new home, or looking to renew or refinance, these are likely the questions on your mind. So, let’s break down the key differences between fixed and variable mortgage rates and explore which might be the better fit for you.
To add some expert Meridian input, we reached out to our Mike Healy, MBA, Regional Manager, Mobile Mortgage Sales for his insights on the topic.
What is a FIXED interest rate mortgage?
Did you know that between 2020 and April 2025, the Bank of Canada made 17 changes to interest rates, specifically 10 hikes and seven cuts? This kind of volatility highlights just how unpredictable borrowing costs can be.
That’s why many first-time homebuyers—or those renewing or refinancing—opt for a fixed-rate mortgage and the peace of mind that it may offer.
As the name makes clear, a fixed-rate mortgage is a home loan where the interest rate remains the same throughout the term of the mortgage. Your monthly payments stay the same, irrespective of interest rate hikes by the Bank of Canada.
Fixed rate could be your best choice if:
- You prefer predictable monthly payments
- You plan to stay in your home for the full length of the mortgage term
- You’re risk averse and want to avoid the stress of unpredictable interest hikes
- You have a steady income and a consistent budget
Meridian’s Mike Healy pointed out that, “If ratios are tight, it may be easier for you to qualify for a fixed-rate mortgage as opposed to a variable-rate mortgage. Since variable rates fluctuate, lenders apply stricter stress test criteria, making qualification more difficult.”
Fixed rate might NOT be for you if:
- You expect Bank of Canada interest rates to drop in the near future
- You’re planning to sell or refinance your home before your mortgage term ends
- You want to benefit from potentially lower initial rates offered in a variable-rate mortgage
Some lenders, including Meridian, let you transfer your current mortgage to a new home—this is called a “portable” mortgage. It means you don’t need to break your mortgage or get a new one when you move. “If you're choosing a fixed-rate mortgage, look for one with this option for more flexibility in the future,” Healy advised.
What is a VARIABLE interest rate mortgage?
On the flip side, a variable-rate mortgage (sometimes called an adjustable-rate mortgage) comes with an interest rate that can change over time, typically tied to the Bank of Canada’s policy prime rate.
Variable rate could be your best choice if:
- You're comfortable with your interest costs rising or falling with changes to the prime rate
- You expect mortgage interest rates to decrease during your mortgage term
- You plan to sell or refinance your home before the end of your mortgage term
Variable rate might NOT be for you if:
- You prefer knowing exactly how your payments are split between interest and principal
- You want to avoid the uncertainty and potential risk of interest rate hikes
- You have a fixed or tight budget and need consistent monthly payments
When Canada’s prime rate changes: a rate comparison to consider
Alan takes out a $500,000 variable-rate mortgage initially at Canada’s prime rate plus 1.5%.
When the prime rate is 5%, his mortgage rate is 6.5%, resulting in a monthly payment of approximately $3,160 (based on a 25-year amortization).
If the Bank of Canada raises the prime rate to 6%, Alan’s mortgage interest rate increases to 7.5%, and his monthly payment jumps to around $3,570—an increase of more than $400 per month, or $4,800 per year.
If Alan had initially opted for a fixed rate, his mortgage interest rate and monthly payments would have remained steady, shielding him from the effects of rising rates. However, if Canada’s prime rate had decreased, Alan would not have benefited from the resulting lower from a variable-rate mortgage.
Switching from fixed to variable or vice versa: the pros and cons
Some Canadian institutions, such as Meridian, let you switch from a variable-rate to a fixed-rate mortgage during the mortgage term. Why do this? “In a declining interest rate market, borrowers typically start with a variable rate and then lock in a fixed rate for long-term stability,” Healy explained.
Here are three key things to consider doing before making a switch from from fixed to variable or vice versa:
- Count the cost: Check your loan agreement for penalties when switching between fixed and variable rates. Fixed-rate penalties, based on the Interest Rate Differential (IRD), can exceed $5,000, depending on factors like rate difference and time remaining. Variable-rate penalties are usually three months' interest, typically under $2,000 for a $400,000 mortgage.
- Customize your mortgage: Talk to your lender about your options when renewing or refinancing. They can explain the costs and terms of switching between variable and fixed mortgages. For example, Meridian can customize your rate and lock it in for 120 days.
- Complete an application: Once you verify your financial situation, submit the necessary documents and finalize all the details with your lender.
Let’s have a deeper conversation
Still not sure about the variable versus fixed choice? Meridian’s mortgage specialists are here to help you navigate the options and choose what’s right for you — with personalized advice, competitive rates, and flexible terms.
When you’re ready, make an appointment with a Meridian Mortgage specialist.
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