In this article, we’ll review:

• The difference between variable vs fixed mortgage rates.
• Should you take a variable rate? 4 Reasons why a variable rate could lead to more savings in 2025 – 2026:
  • Historical, long-term evidence of variable rate cost savings. 
  • When and by how much the variable rate is expected to drop. 
  • How to minimize the risk associated with a variable rate mortgage.
  • How variable rates offer more flexibility and lower penalties than fixed rates. 
• Is it a good time to lock a variable into a fixed rate?
  • How to time a fixed rate lock in. 
  • Variable mortgage rate lock in guide.
• The best questions and personal considerations to help determine your best rate strategy.

Variable vs Fixed Mortgage Rates: Features Compared

The short video below will clarify the differences between variable and fixed mortgage rates and provide a good basis for our discussion.

To summarize:

Fixed Rate:

• Locks your rate into place for a period of time called the term (usually 1,2,3,4 or 5 years).
• Rate is typically a bit higher, but provides for a stable, consistent mortgage payment for years to come.
• If you break the mortgage, there is often a bigger penalty called an ‘Interest Rate Differential’ penalty.
• Switching from a fixed rate to a variable rate without breaking the mortgage is impossible.

Variable Rate:

• The rate floats or changes over time, with decisions from the Central Bank of Canada.
• The rate is determined using a discount off of the Prime Rate (ex. Prime minus .50%).
• Typically, the variable rate is lower than fixed, but can also float higher for periods. 
• If you break the mortgage, the penalty is typically far lower.
• You can lock the variable rate into a fixed rate at any time, without breaking the mortgage.

Should you take a variable rate? 4 Reasons why a variable rate could lead to more savings in 2025-2026

1. Variable is Historically and Statistically Shown to Cost Less than Fixed

According to a 2001 report completed by Moshe Milevsky, Professor of Finance at York University Schulich School of Business, variable mortgage rates beat 5 year fixed rates 70% – 90% of the time. 

Using data from 1950 – 2000 the study includes a period of high market volatility in the 1980s and 1990s when mortgage rates were much higher than they are at present, not unlike what we are witnessed in 2022 – 2024. This means that the data used in this study is not selected during a period that would manipulate the results to favour a variable rate over a fixed rate. 

I believe it’s quite the opposite. I believe that the volatility in rates in the 1980s and 1990s, and more recently in 2022 and 2023, skews the argument toward fixed rates, and that it is more likely for rates to remain lower over the long term than the peak rates seen during periods of high inflation. 

With this said, in the author’s words “When interest rates are at low levels, one is better off locking in at long term rates”.

To summarize, the author of the study suggests that variable rates are the better choice much of the time, but locking into a fixed-rate mortgage at the right time can result in mortgage rate savings. We will address the variable rate lock in feature, later in this article. 

Some will point to higher interest rates during the 1980s and 1990s, and to the more recent 2022/2023 rate increases, as reasons to avoid a variable rate. This thinking is understandable, however, as we will review below, we live in a very different, debt-laden economy now, whereby the effects of a 1% higher Central Bank rate have approximately 5 times the economic impact as a 1% higher rate did in the 1980s. Indeed, adjusted to inflation, private and public debt levels are currently more than 5 times higher than in the 1980s.

For example, a single family house in the 1970s and 1980s may have cost $50,000 with a $40,000 mortgage.  Today, an average house in Canada costs well over $700,000 with many mortgages over $500,000. In the GVA and GTA, these numbers are more exaggerated. 

As Federal, provincial, and public debt continue to accumulate (at a time of ‘record budget deficits’), the weight that high interest rates have becomes even greater.

These are different economic times, with different consequences of higher rates.

Therefore, even with 8% inflation in 2022, we did not see the high 10%+ rates seen in the 1980s and 1990s. Variable mortgage rates mostly peaked in the 6% range for 8 months, until rates ultimately moved lower into the mid 3% range in late 2025, as inflation was subdued.

The variable rate strategy may be seen as a ‘buy and hold’ stock market strategy. Over the long term, you are likely to do well, as long as the shorter term periods of volatility can be withstood, or properly managed.

2. Conditions for Further Variable Rate Drops in 2025 – 2026

At their October 2025 meeting, the Bank of Canada noted that it is satisfied with the current level of its policy rate. Moreover, the current BoC rate at 2.25% is factoring in economic softness. So if employment declines another 1% in Canada for example, and the economy slips – this is already factored in to the current rate level.

Accordingly, here are the current Bank of Canada rate cut odds:

• Chances of a Cut on December 10, 2025: 13%
• Chances of a cut in 2026: 35%

These numbers change daily and are updated weekly as economic trends evolve.

What’s needed for further rate cuts is a more substantial economic decline or crisis.

The biggest threat to Canada’s economy currently is the US trade war. If CUSMA is not negotiated well for Canada, we could see a more substantial economic decline, and this could lead to reduced variable rates.

Other potential influences are:

• A Banking or economic crisis (globally or in Canada)
• A disease pandemic
• Broader political instability, conflict/war

It seems that every 10 years or so, there has been a crisis of some sort that has hit the Globe and Canada. Although the hope is for a longer period of stability and no further crises, this may be overly wishful thinking.

The variable rate acts as a hedge against these negative economic influences because, in order to stimulate a struggling economy, the Bank of Canada is likely to continue cutting rates. In other words, what’s bad for the economy is good for variable mortgage rates.

Moreover, current financial models are terrible at factoring in these ‘black swan’ types of events. So the rate odds we see are not likely to be accurate if an economic emergency were to occur within the next 5 years. If the historical likelihood of a financial event were factored in, the odds of further cuts would likely be higher.

Click here for our full mortgage interest rate forecast.

3. How to minimize the risk associated with a variable-rate mortgage

Here, we revisit the fundamental question of why we are even discussing a fixed- or variable-rate mortgage. The answer for most is to save more money on their mortgage, in one way or another. 

The strategy here will show you how to lower your risk on a variable mortgage while also helping you save substantially on interest over time.

I call this more specifically, ‘variable rate risk mitigation’ and it involves keeping variable rate mortgage payments higher, and equivalent to today’s 5-year fixed rates. In other words, because the variable mortgage rate is lower, and this results in a lower payment, you can use mortgage pre-payment privileges to increase the variable rate payment to the equivalent of a current fixed mortgage rate payment.

The result is that you are taking advantage of the lower variable rate to repay the mortgage principal faster, and because you have less mortgage over time, this reduces your risk. If rates increase in the future, you will have gotten ahead, saved on interest and lessened the effect of the potentially higher future rates.

For example:

In the above example, the difference between variable and fixed mortgage payments is $114 per month.

So you would use the pre payment privileges in your mortgage to pay an extra $114 per month in principal payment to pay down your mortgage faster.

This additional principal payment would reduce your mortgage balance much faster, increase your net worth, and substantially reduce future interest payments.  It would mitigate variable-rate risk.

Variable Rate Payment Shock Protection

You could consider an even higher variable mortgage rate to accelerate amortization and further mitigate risk. It does not have to be based on comparable fixed rates. For example, you could base the payment on a higher posted bank rate closer to 5%. This would also protect you from a ‘what if rates increase’ scenario. If rates moved higher a few years out, you could reduce your prepayments, thereby protecting you from payment shock.

For your personalized risk mitigation analysis on fixed vs. variable rates, connect with Altrua Financial.

Note: For ‘true’ variable mortgages, the payment will not drop when the rates drop. Instead, a request would be made to the Bank to reduce the payment along with the rate. Many mortgages are ‘adjustable rate mortgages’ where the payment rises and falls automatically with changes in the rate. So those with adjustable rate mortgages would need to be more proactive with the prepayment, unlike the true variable, which will remain higher in accordance with this planning.

4. How variable rates offer more flexibility and lower penalties than fixed rates.

Closely related to lowering risk, as emphasized in the last point, are the lower penalties and increased flexibility built into a variable rate mortgage. Specifically, most variable mortgage rates only ever charge a 3 month interest penalty to break. These features are a cornerstone of a variable rate.

Even though the rate itself is not as predictable looking out over the term, the penalty required if the mortgage is brokered is predictable because it’s only ever a 3-month interest penalty.

This is in contrast to a 5-year fixed mortgage, which can easily result in a penalty in $10,000 + range if the mortgage is broken during the term. Especially if mortgage rates drop in the market,.

In fact, some mortgage and financial professionals go as far as to say the lower variable rate penalty is the main benefit of a variable rate mortgage, given how fixed-rate breakage penalties 

So when looking at the variable vs. fixed mortgage debate, it’s essential to consider that, especially during the first 3 years of a 5-year fixed-rate mortgage, the penalty for breaking the mortgage can be extremely high.

As a mortgage broker for over 17 years, I have seen many individuals faced with massive ‘interest rate differential penalties’, when breaking their fixed rate mortgage for any number of reasons:

• Moving
• Refinancing to pull out equity
• Switching into a lower rate
• Family changes
• Many more…

This trend was especially the case in 2020-2021 as many who are in a fixed-rate mortgage in the mid-high 3% range were faced with cost-prohibitive penalties in the $10,000’s to break their higher-rate mortgage, when mortgage rates fell to the 2% range.

This happened again in 2023-2024 when mortgage rates fell from the mid 5% range, down to the mid 3% range where they are today.

This was not the case for those in a variable rate mortgage, and this kind of variable rate flexibility could certainly come into play again in 2024-2026 if  fixed rates decrease more than expected.

While a detailed discussion of penalty details is beyond the scope of this article, the point is that most variable rate mortgages (the mortgage products without high penalty fine print) will only ever charge 3 months interest penalty if you end up breaking the mortgage. The 3 month interest penalty is far lower – often to the tune of thousands of dollars lower than comparable fixed rate mortgage penalties.

A five-year standard fixed-rate mortgage term is a long time, and it can be difficult to predict precisely how the economy and financial markets will play out years into the future. An essential financial planning strategy is to remain flexible and agile to accommodate changes. 

The variable-rate mortgage is, in many cases, the right financial tool to accommodate these potential changes while minimizing associated risks.

Is it time to lock into a fixed mortgage rate?

 One of the fundamental benefits of a variable rate is the ability to lock into a fixed rate.

At the beginning of the article we discussed an academic study by Moshe Milevsky that saw variable rates saving homeowners a majority of the time, however there were times in the interest rate cycle that a fixed rate would have been better. 

Few can accurately time the market, however, when the economy is soft and rates are lowered to stimulate the soft economy, this may be a sign that mortgage rates (fixed and variable rates) are closer to their low point in the cycle.

Buy high…  the variable rate  

Sell low… the variable rate

If mortgage rates temporarily dip to the low to mid 3% range, for example, you could lock in the variable rate to a fixed rate at a time when rates are lower.

Current Mortgage Market Trends Affecting Variable Rate Locking

Currently, the Bank of Canada has signalled that we are at a market bottom. The financial market odds also point to a rate pause. However, that does not rule out the possibility of further cuts. Instead of basing the decision solely on mortgage rate forecasts in Canada, let’s consider a more personalized risk tolerance approach.

Variable Mortgage Rate Lock-in Guide

This guide will help you determine, based on your own personal risk tolerance and comfort levels, if it might be a good time to lock a variable rate into a fixed rate (or apply for a fixed rate if renewing or purchasing):

Financially Conservative/ Rate Sensitive: Should consider locking in a rate under 4% for 5 years fixed. Even though rates are higher, its not by too much. And it’s hard to put a price on a good nights sleep.

Financially Bold/ High Rate Tolerance: Should consider floating with a variable. It’s possible that rates drop further from here as the economy changes, and new headlines come our way. With a higher cash flow cushion, additional mortgage pre-payments and more market-based investing,it  creates a cushion to mitigate risk.

Somewhere in the middle? Sleep on it for a few nights. If you lean towards variable, have a really solid risk mitigation (pre payment plan) plan thats based on a higher fixed rate, such as a 5% rate. This will help repay the principal faster and reduce a payment shock if rates are higher in the future. Connect with Altrua Financial to discuss.

How to lock a variable into a fixed mortgage rate

This involves simply calling the lender and requesting the lock in. No additional documents are required as long as payments are up to date.

If you are looking to lock in your variable rate, and if you see a much better deal at a different lender that the current lender is not willing or able to match, since the variable mortgage rate penalty is relatively lower (typically 3 months interest penalty), it can make sense to pay the penalty to switch lenders for the lower rate. The fact that mortgage holders can do this tends to keep lenders a bit more honest in fixed rate lock in offerings (but unfortunately, not always…). 

Rate Survey: Questions and considerations to determine your best rate strategy

• Do you have a good understanding of how the variable rate works, and how swings in the rate can affect your mortgage payment?
• If you were to buy an investment, such as a mutual fund, would it be:
  • Conservative? (low risk, more stable, lower potential return). Consider a 5 year fixed mortgage rate.
  • Balanced? (moderate risk, more volatile, but more opportunity for higher returns). Consider a variable with a good risk mitigation strategy
  • Growth? (more risk, the maximum opportunity for a higher return.) Consider a variable mortgage rate.
  • If you’re still unsure of what investment category you’d fit into, try searching for an investment risk profile to see where you might end up.
• Are you comfortable if the variable rate increases slightly higher, and could potentially increase further than projected?
• Do you have some excess or can you create excess cash flow to manage higher variable rate payments? Or would potentially higher variable rates put you in a highly uncomfortable or dangerous financial position?
• Have you calculated what your maximum tolerable mortgage payment can be? What kind of variable rate would this look like? Are you comfortable with this rate?

 The decision should not be made based on the positive or negative news of the day. News is designed to swing your emotions.

Thank you for reading, and connect with Altrua for answers to your questions and a customized rate strategy.