Fixed vs. Variable Mortgages: Which is Right for You?

Tim Lyon • September 25, 2025

When arranging a mortgage, one of the first decisions you’ll need to make is whether to go with a fixed or variable rate. Both options have their own benefits and challenges, and understanding the differences will help you choose the one that fits your financial situation best.


In this post, we’ll break down the differences between fixed and variable mortgages, how they’re priced, the pros and cons of each, and what you should consider before making a decision.


What are Fixed and Variable Mortgages?

Fixed Rate Mortgage: Your interest rate stays the same for the entire mortgage term. That means your monthly payments won’t change, making budgeting more predictable.


Variable Rate Mortgage: Your interest rate changes during the term. There are two main types:

  • Variable Rate Mortgage (VRM): Your payment amount stays the same, but how much goes toward principal vs. interest changes as rates move.
  • Adjustable Rate Mortgage (ARM): Your payment amount itself changes when rates move.


How Do Fixed and Variable Mortgages Work?

Fixed
  • Your rate is set when you sign your mortgage contract.
  • Payments remain consistent, regardless of whether interest rates rise or fall.
  • Fixed rates are heavily influenced by the Canadian 5-year bond yield.
Variable
  • Your rate is tied to your lender’s prime rate, which follows the Bank of Canada’s overnight lending rate (reviewed 8 times a year).
  • Lenders usually offer a discount from prime, such as Prime – 0.4%.
  • You can often lock into a fixed rate at any time (though usually for a term equal to or longer than what’s left on your mortgage).


Penalties for Breaking Your Mortgage

Fixed
  • The greater of three months’ interest or the Interest Rate Differential (IRD). IRD can be very costly if rates have dropped since you signed.
Variable
  • Always three months’ interest — simpler and usually less expensive.


Pros and Cons

Fixed Rate Pros:
  • Predictable payments, easier budgeting
  • Protection if rates rise
  • Currently about 1% lower than variable, meaning you may qualify for more
Fixed Rate Cons:
  • More penalty risk if you break the mortgage early
  • You miss out if rates fall


Variable Rate Pros:
  • Benefit if rates decrease
  • Less penalty risk(3 months’ interest)
  • Option to lock into fixed at any time
Variable Rate Cons:
  • Payments (ARM) or interest portion (VRM) can rise if rates go up
  • Less predictable for budgeting
  • Lock-in rates may not always be the best available



Quick Summary

• Fixed mortgages = stable, predictable, tied to bond yields, but more penalty risk.
• Variable mortgages = tied to Bank of Canada, potential savings, lower penalty risk, but less predictable.
• VRM vs. ARM = VRM keeps payments steady while ARM adjusts payments with rates.


Next Steps

Choosing between fixed and variable depends on your risk tolerance, financial goals, and comfort with rate changes. If you’re unsure which option is right for you, let’s talk about your situation and find the best fit.

Need help with your mortgage? Book a consultation or call 778-988-8409.


Mortgage Term Glossary

Adjustable Rate Mortgage (ARM): A variable mortgage where payments increase or decrease as rates change.
Amortization: The total length of time it will take to pay off your mortgage completely (typically 25–30 years in Canada).
Bond Yield: The return investors get from government bonds. Used as a benchmark for fixed mortgage rates.
Down Payment: The upfront amount you pay toward the purchase price of a home, expressed as a percentage of the total price.
Equity: The difference between what your home is worth and what you owe on your mortgage.
Fixed Rate: An interest rate that stays the same for the entire mortgage term.
Interest Rate Differential (IRD): A penalty calculation for breaking a fixed mortgage when current rates are lower than your original rate.
Lock-In: The option to switch from a variable mortgage to a fixed mortgage during your term.
Mortgage Term: The length of your mortgage contract with your lender (typically 1–5 years), after which you need to renew.
Prime Rate: The interest rate banks use as a baseline for loans, influenced by the Bank of Canada’s overnight rate.
Variable Rate Mortgage (VRM): A variable mortgage where payments stay the same, but the principal vs. interest split changes with rate moves.
Variable Rate: An interest rate that changes during your mortgage term based on lender prime rates.

Tim Lyon

Mortgage Consultant

Locking in a Variable Rate Mortgage

By Tim Lyon • September 25, 2025
If you have a variable rate mortgage and recent economic news has you thinking about locking into a fixed rate, here’s what you can expect will happen. You can expect to pay a higher interest rate over the remainder of your term, while you could end up paying a significantly higher mortgage penalty should you need to break your mortgage before the end of your term. Now, each lender has a slightly different way that they handle the process of switching from a variable rate to a fixed rate. Still, it’s safe to say that regardless of which lender you’re with, you’ll end up paying more money in interest and potentially way more money down the line in mortgage penalties should you have to break your mortgage. Interest rates on fixed rate mortgages Fixed rate mortgages come with a higher interest rate than variable rate mortgages. If you’re a variable rate mortgage holder, this is one of the reasons you went variable in the first place; to secure the lower rate. The perception is that fixed rates are somewhat “safe” while variable rates are “uncertain.” And while it’s true that because the variable rate is tied to prime, it can increase (or decrease) within your term, there are controls in place to ensure that rates don’t take a roller coaster ride. The Bank of Canada has eight prescheduled rate announcements per year, where they rarely move more than 0.25% per announcement, making it impossible for your variable rate to double overnight. Penalties on fixed rate mortgages Each lender has a different way of calculating the cost to break a mortgage. However, generally speaking, breaking a variable rate mortgage will cost roughly three months of interest or approximately 0.5% of the total mortgage balance. While breaking a fixed rate mortgage could cost upwards of 4% of the total mortgage balance should you need to break it early and you’re required to pay an interest rate differential penalty. For example, on a $500k mortgage balance, the cost to break your variable rate would be roughly $2500, while the cost to break your fixed rate mortgage could be as high as $20,000, eight times more depending on the lender and how they calculate their interest rate differential penalty. The flexibility of a variable rate mortgage vs the cost of breaking a fixed rate mortgage is likely another reason you went with a variable rate in the first place. Breaking your mortgage contract Did you know that almost 60% of Canadians will break their current mortgage at an average of 38 months? And while you might have the best intention of staying with your existing mortgage for the remainder of your term, sometimes life happens, you need to make a change. Here’s is a list of potential reasons you might need to break your mortgage before the end of the term. Certainly worth reviewing before committing to a fixed rate mortgage. Sale of your property because of a job relocation. Purchase of a new home. Access equity from your home. Refinance your home to pay off consumer debt. Refinance your home to fund a new business. Because you got married, you combine assets and want to live together in a new property. Because you got divorced, you need to split up your assets and access the equity in your property Because you or someone close to you got sick Because you lost your job or because you got a new one You want to remove someone from the title. You want to pay off your mortgage before the maturity date. Essentially, locking your variable rate mortgage into a fixed rate is choosing to voluntarily pay more interest to the lender while giving up some of the flexibility should you need to break your mortgage. If you’d like to discuss this in greater detail, please connect anytime. It would be a pleasure to walk you through all your mortgage options and provide you with professional mortgage advice.

What’s the Difference Between a Variable Rate Mortgage and an Adjustable Rate Mortgage?

By Tim Lyon • September 24, 2025
When considering a variable-rate mortgage, you’ll come across two different types: the Variable Rate Mortgage (VRM) and the Adjustable Rate Mortgage (ARM) . While both are tied to your lender’s prime rate and move when the Bank of Canada changes rates, they work differently and those differences can impact your budget and long-term strategy. Both are colloquially referred to as “variable mortgages,” so it’s important to understand and clarify which one you are being offered if you’re considering a variable option. In this post, we’ll break down how ARMs and VRMs work, the pros and cons of each, and which option may suit your financial goals better.  What Are ARM and VRM Mortgages? Variable Rate Mortgage (VRM): Your payment amount stays the same when rates change, but the portion of each payment that goes toward principal versus interest adjusts. Adjustable Rate Mortgage (ARM): Your payment amount itself changes whenever the lender’s prime rate moves. How Do They Work? VRM: Fixed Payment, Shifting Balance Your monthly payment stays constant. If interest rates go down, more of your payment goes toward principal, helping you pay off your mortgage faster. If interest rates go up, more of your payment goes toward interest, slowing your progress on the principal. If rates rise significantly, lenders may increase your payment to make sure it still covers interest owing. ARM: Payment Moves With Rates Your payment is recalculated each time the prime rate changes. If interest rates go down, your payment decreases. If rates go up, your payment increases. The principal vs. interest portion of your payment remains more consistent compared to a VRM. Pros and Cons VRM Pros: Predictable monthly payment amount Benefit from rate drops through faster principal repayment Easier for budgeting in the short term VRM Cons: Progress on principal slows if rates rise Risk of payment shock if rates rise too much and the lender resets your payment higher ARM Pros: Payments decrease when rates fall Principal repayment stays on track, even when rates change Clearer link between rates and what you pay monthly ARM Cons: Payments increase right away if rates rise Harder to budget with changing monthly payments Quick Summary • VRM = fixed payment, changing interest/principal split. • ARM = changing payment, consistent repayment pace. • Both are tied to prime, but they affect budgeting differently. Next Steps Choosing between ARM and VRM depends on your comfort with changing payments versus changing repayment speed. If you’d like to review which one is best for your situation, I’d be happy to walk you through the options. Need help with your mortgage? Book a consultation or call 778-988-8409 . Mortgage Term Glossary Adjustable Rate Mortgage (ARM) : A variable mortgage where the payment amount increases or decreases as rates change. Amortization: The total length of time it will take to pay off your mortgage completely (typically 25–30 years in Canada). Discount (Variable Rate): The amount subtracted from prime to determine your actual mortgage rate. Equity: The difference between what your home is worth and what you owe on your mortgage. Mortgage Term: The length of your mortgage contract with your lender (typically 1–5 years), after which you need to renew. Prime Rate: The interest rate banks use as a baseline for loans, influenced by the Bank of Canada’s overnight rate. Variable Rate Mortgage (VRM): A variable mortgage where payments stay the same, but the interest vs. principal portion shifts with rates. Variable Rate: An interest rate that changes during your mortgage term based on lender prime rates.