How Mortgage Rates Work: Fixed vs. Variable

Tim Lyon • September 26, 2025

What affects mortgage rates? Does the Bank of Canada rate affect fixed-rate mortgages? These are questions that come up all the time, so in this this post, I’ll explain how fixed and variable rates are determined, why they don’t always move together, and what that means for you as a borrower.


But to start with the short answer: While Bank of Canada announcements immediately impact variable rates, fixed rates usually have those expectations already baked in long before the announcement. That’s because fixed rates are forward-looking — they reflect where markets think rates are headed, not just where they are today.


What Are Fixed and Variable Rates?

Fixed Rate

The interest rate stays the same for the entire mortgage term. Payments remain consistent, no matter what happens in the market.


Variable Rate

The interest rate changes during the mortgage term, moving up or down depending on the lender’s prime rate. Payments may stay the same (VRM) or change (ARM).


How Do Fixed Rates Work?

When you choose a fixed rate, the lender is guaranteeing your rate for the length of your term. To do this, they need to estimate what a fair rate will be over that time. This makes fixed rates more forward-looking — they often reflect not just today’s conditions, but also what the market expects to happen in the future.


Key Points About Fixed Rates
  • Strongly influenced by the Canadian bond market (especially the 5-year government bond yield).
  • Lenders adjust their fixed rates based on investor expectations for inflation and future interest rates.
  • Often, Bank of Canada moves are already baked into fixed rates before they happen.


Example

If bond yields suggest that rates will rise in the next year, lenders may increase fixed rates now, even if the Bank of Canada hasn’t made a move yet.


How Do Variable Rates Work?

Variable rates move directly with the Bank of Canada’s overnight rate. When the Bank of Canada raises or lowers its rate, lenders adjust their prime rate accordingly, and variable mortgages follow.


For borrowers, the most important detail is the discount from prime, because that sets the actual rate you pay. For example, if prime is 4.95% and your mortgage is Prime – 0.5%, your rate is 4.45%.


The discounts lenders offer change over time. In periods of economic uncertainty, lenders usually shrink the discount they offer, which can make new variable mortgages less attractive even if prime is coming down.


Key Points About Variable Rates
  • Directly tied to the Bank of Canada’s overnight rate, which is reviewed eight times a year.
  • Banks adjust their prime rate in response to these moves.
  • Your actual rate = Prime – discount (e.g., Prime – 0.5%).


Example

If prime is 4.95% and your mortgage is Prime – 0.5%, your rate is 4.45%. If the Bank of Canada cuts rates by 0.25%, prime drops to 4.70%, and your rate automatically drops to 4.20%.


Why Don’t Fixed and Variable Always Move Together?

  • Fixed rates reflect the bond market, which looks ahead at where rates and inflation may go.
  • Variable rates respond directly to Bank of Canada decisions, reflecting current conditions.
  • This is why fixed rates can fall while variable rates stay flat, or vice versa.


Next Steps

If you’re deciding between fixed and variable, understanding how each is set is the first step. The next is to match the right mortgage type to your budget and comfort with risk. If you’d like to review which option works best for you, I’d be happy to help.


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


Mortgage Term Glossary

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.
Discount (Variable Rate): The amount subtracted from prime to determine your actual mortgage rate.
Fixed Rate: An interest rate that stays the same for the entire mortgage term.
Mortgage Term: The length of your mortgage contract with your lender (typically 1–5 years), after which you need to renew.
Overnight Rate: The interest rate at which major banks borrow and lend money to each other, set by the Bank of Canada.
Prime Rate: The interest rate banks use as a baseline for loans, influenced by the Bank of Canada’s overnight rate.
Variable Rate: An interest rate that changes during your mortgage term based on lender prime rates.

Tim Lyon

Mortgage Consultant

25 Year vs 30 Year Amortization: A Practical Guide

By Tim Lyon • January 25, 2026
Trying to choose between a 25 and 30 year mortgage amortization? Learn how each affects your payments, interest, and flexibility so you can decide with confidence.

How Rental Income Impacts Your Mortgage Approval (And Why Lender Choice Matters)

By Tim Lyon • January 20, 2026
If you are buying a home with a suite, keeping your current home as a rental, or already own a rental property, mortgage qualification can get confusing fast. The frustrating part is that you can do everything “right” and still get very different answers depending on which lender you talk to. Here’s a simple breakdown so you understand it and don’t miss out. What are Debt Service Ratios? In Canada, lenders qualify you using two main ratios: Gross Debt Service (GDS) This looks at housing costs only , typically: Mortgage payment Property taxes Heating 50% of strata fees (if applicable) GDS typically needs to be 39% or less of your gross income. Total Debt Service (TDS) This includes everything in GDS , plus other debts like: Car loans Credit cards Lines of credit Student loans TDS typically needs to be 44% or less of your gross income. These ratios are the foundation. If they do not work, the lender will not approve the mortgage, even with strong credit and a solid down payment. How Lenders Treat Rental Income Most people assume lenders look at rental properties based on simple cash flow (rent minus mortgage payment). In reality, most lenders use one of two methods: 1) Addback A percentage of the rental income is added to your gross income for qualification purposes. 2)Offset A percentage of the rental income is subtracted from the mortgage payment tied to the rental property. Different lenders use different percentages and different worksheets. That is why the same borrower can qualify with one lender and fail with another. Benefits of Understanding Lender Methods When you understand how rental income is calculated, you can: Avoid being under-qualified by a lender with conservative rules Get a more accurate picture of your real purchasing power Choose a lender that fits your situation (instead of forcing your situation to fit the lender) Important Considerations A few key points to keep in mind: Rental income is rarely counted at 100% , but some lenders are more generous than others. The method matters just as much as the percentage (addback vs offset). If you own multiple properties, lender worksheets can change the result dramatically. Your lender choice is a strategy decision , not just a rate decision. Real-World Example: Same Clients, Two Very Different Outcomes Here’s an example comparing lenders Scotiabank and Strive, using a fictitious couple: Scenario Household income: $160,000 Existing townhome: $800,000 value with a $525,000 mortgage ( $2,500/month payment) Market rent for the townhome: $3,400/month New purchase: property with a rental suite generating $1,800/month Down payment: 10% Other debts: student loan $165/month , car loan $500/month How Scotiabank viewed it For the townhome rental, they counted half the rent and subtracted the mortgage payment, leaving an $800/month shortfall that gets added into the debt ratios. For the new purchase, 50% of the suite income gets added to income. Max mortgage : $650,700 Max purchase price : $723,000 How Strive viewed it For the townhome rental, Strive used a rental worksheet and calculated $5.20/month of income that can be added to the application. For the new purchase, 100% of the suite income gets added to income, and they did not need to include taxes or heat. Max mortgage : $878,400 Max purchase price : $976,000 The result That’s a $253,000 difference in purchasing power , with the same clients, same income, same debts, and same properties. The difference was lender policy. Quick Summary GDS and TDS ratios are the backbone of mortgage qualification. Rental income is usually counted using Addback or Offset , and each lender handles this differently. Two lenders can produce wildly different results, even with the exact same file. In the example above, lender choice created a $253,000 swing in purchasing power. Next Steps If you are planning to: Buy a home with a suite Keep your current home and convert it to a rental Use rental income to qualify Reach out and I will run the numbers across multiple lenders so you see what you actually qualify for, not just what one lender will allow. Need help with your mortgage? Book a consultation or call 778-988-8409 . Glossary Addback : A method where a lender adds a percentage of rental income to your gross income for qualification. Gross Debt Service (GDS) : The ratio that measures housing costs as a percentage of gross income. Offset : A method where a lender subtracts a percentage of rental income from the rental property’s mortgage payment for qualification. Total Debt Service (TDS) : The ratio that measures housing costs plus other debts as a percentage of gross income.