Every renewal season, the fixed-vs-variable debate resurfaces. Financial media frames it as a prediction contest: will rates go up or down? Pick the winner, save money.

That framing is almost entirely useless. Nobody knows where rates are going. More importantly, it’s the wrong question.

The right question is: at what average variable rate, over my term, does the fixed option become cheaper? That number — the breakeven rate — gives you something concrete to reason about, regardless of what actually happens.

How Canadian mortgage rates are structured

First, a quick grounding. Canadian mortgage rates are quoted as nominal rates compounded semi-annually, as required by the Interest Act. This is different from US mortgages, which compound monthly. The practical effect is that a 5.00% Canadian mortgage rate is slightly lower in effective cost than a 5.00% US mortgage rate.

Variable rates in Canada are expressed as a premium or discount to the Bank of Canada’s prime rate. When the prime rate changes — which it does at BoC policy rate announcements, roughly eight times per year — your variable rate and payment move accordingly.

Fixed rates are set by lenders based on Government of Canada bond yields, primarily the 5-year bond for 5-year fixed mortgages. They move independently of the prime rate, though they’re broadly correlated over long periods.

The breakeven calculation

Suppose you’re choosing between:

  • A 3-year fixed rate at 4.89%
  • A current variable rate at 4.44% (prime minus 0.50%)

Variable starts 0.45% cheaper. But what if the Bank of Canada raises rates?

The breakeven asks: what average variable rate over the 3-year term results in the same total interest as the fixed rate?

On a $450,000 mortgage with 20 years remaining, the approximate breakeven is around 5.20% average over the term. That means: if the variable rate averages below 5.20% over the next three years, variable wins. If it averages above, fixed wins.

Your next question is: how likely is it that the variable rate averages above 5.20% over the next 36 months? That’s a much more tractable question than “will rates go up?” Because now you’re reasoning about the degree of rate increase required for fixed to win — not the direction.

What the current rate curve tells you

The shape of the yield curve — the relationship between short and long-term rates — matters at renewal. In a normal upward-sloping curve, longer terms cost more, which is the premium for rate certainty. When the curve is flat or inverted, that premium shrinks or disappears.

In Canada’s 2024–2026 rate environment, the curve has been relatively flat, with 1 and 2-year fixed rates occasionally higher than 3 and 5-year rates. This creates a scenario where:

  • Short terms aren’t necessarily “cheap”
  • Long terms may offer more certainty at little additional cost
  • The breakeven analysis matters more than usual, because the directional heuristics break down

This is precisely why running the numbers for each specific term — rather than applying a rule of thumb — is worth doing at renewal.

Variable rate mortgage flavours in Canada

There are two types of variable-rate mortgages in Canada, and they behave differently when rates change:

Fixed-payment variable: Your payment stays the same when rates change. If rates rise, more of your payment goes to interest and less to principal. If rates rise enough, your payment may not even cover the interest — creating negative amortization. This is the model used by most major banks.

Adjustable-payment variable: Your payment adjusts when rates change. If prime rises by 0.25%, your payment rises accordingly. You always know exactly what’s going to interest vs. principal. This model is common among monoline lenders and is generally more transparent.

When comparing variable options from different lenders, it’s worth knowing which type you’re getting.

Factors that favour fixed at renewal

  • You have a tight monthly budget and cannot absorb payment increases
  • Your remaining amortization is short (under 8 years) — less time to recapture any variable advantage
  • You’re planning to sell within the term — though consider the penalty difference (variable penalties are typically just 3 months interest; fixed can be IRD)
  • Rates are rising and you believe the cycle is early

Factors that favour variable at renewal

  • The breakeven average rate requires a significant rise from where rates are today
  • The rate curve suggests that locking in long isn’t providing meaningful certainty at a low premium
  • You have financial flexibility to absorb payment adjustments
  • You want to preserve prepayment flexibility — variable mortgages are generally easier to break

The penalty asymmetry is real

One factor consistently underweighted in the fixed-vs-variable debate: the cost of breaking your mortgage early.

For variable-rate mortgages, the penalty is almost always 3 months’ interest — predictable and relatively modest.

For fixed-rate mortgages, the penalty is the greater of 3 months’ interest and the IRD (Interest Rate Differential). IRD can be substantial in a falling-rate environment. On a $400,000 mortgage with a significant rate differential and 3 years remaining, an IRD penalty of $15,000–$25,000 is not uncommon.

If there’s any possibility you’ll sell, port, or refinance during the term — which life has a habit of introducing — the penalty asymmetry is worth factoring into your analysis.

The Variable vs Fixed Breakeven tool in RenewalIQ calculates the breakeven average variable rate for your specific balance, term, and rate inputs — and models what happens under different Bank of Canada rate-change scenarios.