A fixed rate is set for the whole term. Your payment does not move and neither does the portion going to principal.
A variable rate is tied to the lender's prime rate, which follows the Bank of Canada's policy rate. When prime moves, your rate moves.
Within variable there are two structures worth distinguishing. On an adjustable-rate mortgage, your payment itself changes when prime changes. On a true variable-rate mortgage, the payment stays the same and the split between principal and interest shifts. The second sounds gentler and carries a specific risk: if rates rise far enough, the payment may no longer cover the interest, and the lender will require an increase. That is called hitting your trigger rate, and a number of Canadians met it during the recent tightening cycle.
Ask which structure you are being offered. They behave very differently in a rising market.
The penalty asymmetry, which is the real story
Here is the part that gets left out of most comparisons.
Breaking a variable mortgage costs three months interest. Almost universally. On a $400,000 balance at five percent, that is around $5,000. Predictable and manageable.
Breaking a fixed mortgage costs the greater of three months interest or an interest rate differential. The differential compensates the lender for the whole remaining term, and its size depends on which comparison rate your lender uses. Some calculate against posted rates rather than the rate you were given, which can produce a penalty several times larger. Five-figure charges are common.
Now consider that a large share of Canadians break a five-year mortgage before it matures. People move, separate, refinance, or restructure. The exit is not a hypothetical.
So if there is a realistic chance you break the term, variable carries a structural advantage that can easily exceed any rate difference. That single consideration is more decisive than most rate forecasting, and it is the thing to weigh first. See how penalties are calculated.
How they qualify differently
Both are stress-tested at the greater of your contract rate plus two percent or 5.25 percent, so the qualifying treatment is broadly similar.
The practical difference is that variable rates are sometimes lower at the point of application, which can slightly improve what you qualify for. It is a minor effect and not a reason to choose one over the other.
What the evidence says, and its limits
Historically, variable has outperformed fixed more often than not over long periods, because borrowers who take fixed are paying a premium for certainty and that premium usually costs something.
Two caveats matter. Historical averages describe long horizons, and your term is five years, which is short enough for the average to be irrelevant to your particular experience. And someone who took variable in 2021 experienced the exception in a way that averages do not capture.
Nobody knows where rates go. Anyone who tells you confidently is guessing with conviction. Choose on your circumstances rather than on a forecast.
Choosing on circumstances
Take fixed if a payment increase would cause genuine difficulty, if you are stretched close to your qualifying limit, if you would find rate movements stressful, or if you are confident you will hold the full term and want certainty. Peace of mind is a legitimate purchase.
Take variable if you have room in your budget to absorb increases, if there is a realistic chance you will move or refinance mid-term, if you would like to convert to fixed later, or if you can tolerate the movement without losing sleep.
That last point is not trivial. A financially optimal choice that keeps you awake is not optimal.
The convertibility option
Most variable mortgages let you convert to a fixed rate mid-term without penalty, at the lender's current fixed rates for the remaining term.
This makes variable less binary than it appears: you can start variable and lock in if you become uncomfortable. The limitation is that you convert at whatever fixed rates then exist, and by the time you feel the urge to convert, fixed rates have usually already risen. Convertibility is real insurance and not free insurance.
Confirm it exists on your specific product, because not every variable mortgage is convertible on reasonable terms. The wider point about checking exit terms rather than only the rate is on comparing rates properly.
A middle option worth knowing
A shorter fixed term, two or three years, gives payment certainty without a five-year commitment or a large differential exposure. For someone who wants certainty but expects change, it is frequently a better answer than either five-year option. See choosing a term, which is arguably a bigger decision than the fixed and variable question itself.
