Fixed vs Variable Mortgage in 2026: A Decision Framework
Both choices are underwritten at the same qualifying rate, explained in the stress test guide. The penalty difference is the whole point of the IRD guide. Renewal timing, including when a switch avoids the prescribed qualifying rate, is the 2026 renewal guide. The hub is the Canadian mortgage guide.
Choose variable if the household can carry a higher payment, you have a real chance of breaking the term, and you have confirmed in the commitment that the penalty is three months' interest. A variable rate is a contract with prime. It is not a prediction that the Bank of Canada will cut.
- On September 23, 2026, the Bank of Canada chartered-bank prime series was 4.45%, and the posted 5-year conventional mortgage rate was 6.09%.
- A variable contract is usually that lender's prime plus or minus a spread. The spread is in the commitment. It is not a number this page will invent.
- The posted 6.09% is a sticker price. The discount between that sticker and a fixed contract is what makes an interest-rate differential large if posted rates fall and you break the term.
- On an illustrative $500,000 loan amortized over 25 years, moving the rate from 4.50% to 5.50% raises the payment by about $285 a month. The 4.50% figure is an assumption, not an offer.
- The Bank's next policy announcement is October 28, 2026. Its September statement said upside inflation risks had increased and that it is prepared to adjust the policy rate.
How do the two contracts differ?
| Fixed | Variable | |
|---|---|---|
| What moves | The rate is set for the term. | The rate moves when that lender's prime moves. Prime itself moves with funding costs, which follow the overnight target. |
| Payment | Principal and interest stay on the schedule you signed, if the payment was calculated at the contract rate. | Some contracts change the payment when prime changes. Others keep the payment and let the amortization drift. Read which one you are signing. |
| Qualifying rate | Greater of contract plus 2% or 5.25%, for a new uninsured loan at a federally regulated lender, and for CMHC-insured debt-service ratios. | Same qualifying-rate rule. A lower contract rate qualifies at a lower stress rate, until the 5.25% floor binds. |
| Penalty to break a closed term | Usually the higher of three months' interest and an interest-rate differential. The differential uses the lender's posted rates and your original discount. | Often three months' interest. TD's public explanation of its own closed variable, for example, describes a three-month interest charge. Your lender may differ. |
| Posted-rate reference | The chartered-bank 5-year posted rate was 6.09% on September 23, 2026. Your discount off a posted rate is the input that inflates IRD. | The prime series was 4.45% the same day. The contract spread around prime is the number to negotiate. |
Table as of September 2026. Sources: Bank of Canada September 2 announcement and September 23 Valet readings; OSFI minimum qualifying rate; TD's public description of its fixed versus variable prepayment charge; FCAC's prepayment-penalty page.
What does one point on prime do to a household?
At 4.50%, the payment is $2,767 a month. At 5.50%, it is $3,052, about $285 more, or about $3,420 a year. At 3.50%, it is $2,496, about $271 less than the 4.50% payment. A variable borrower who cannot cut $285 a month, or lengthen the amortization inside the contract, is a fixed-rate borrower who has not admitted it. The qualifying payment at 6.50% on this loan is $3,349. That is the stress-test figure, and it is not the bill.
The monthly rate used here is (1 + annual rate / 2) to the power of 1/6, minus 1, which is the Canadian semi-annual convention. Over a year, a one-point gap of $285 a month is $3,420. A penalty of $12,000, which is FCAC's own IRD illustration on a smaller loan, takes more than three years of that gap to earn back. Price the penalty before you treat a one-point discount as found money. The method is the penalty guide.
Which risks are you actually taking?
A fixed rate transfers payment risk to the lender for the term, and hands you penalty risk if you leave while your contract rate is above the lender's comparison rate. A variable rate keeps payment risk with you, and usually keeps the exit cheaper. Households that sell on a job transfer, who may separate, or who expect a large prepayment from a bonus, are often paying for an option they will exercise. The option is the three-month penalty. Households that will stay put and who budget to the dollar are paying for a payment that does not change. Match the contract to the move you might actually make.
The Bank of Canada held the overnight target at 2.25% on September 2, 2026, the seventh consecutive hold at that level after the October 2025 cut, and said inflation had been around 3% largely because of gasoline. That is context for the direction of prime. It is not a mortgage rate, and it is not a reason to take a contract you cannot carry if the next move is up. The October 28, 2026 announcement is the next scheduled decision. If a lower payment shows up, sending it back to the mortgage is the prepayment versus investing guide. Using a variable readvance to invest is a second decision, the Smith Manoeuvre, and it belongs on top of a payment you can already carry.
If you are splitting a balance, some combined plans let you put part of the loan in a fixed term and part in a variable term. Scotiabank's STEP page describes dividing a mortgage into portions with their own terms. That is a structure, not a free hedge. Each portion still has its own penalty. The product limits are the readvanceable guide. Money you will not need for the house belongs in the comparison with investing: prepayment versus TFSA and RRSP.
Frequently asked questions
Is variable always cheaper than fixed in Canada?
No. A variable rate wins only on the path prime actually takes, after the spread in your contract. In September 2026 the overnight target is 2.25% and the Bank has said it may adjust. A fixed rate buys a payment. Compare the two written offers, including the penalty, over the term you will actually keep.
What is a typical variable mortgage penalty?
On many closed variable contracts it is three months' interest on the amount you prepay. TD describes its own closed variable that way. Fixed closed contracts usually charge the higher of three months' interest and an interest-rate differential. The commitment controls. Ask for the formula before you sign, and use the lender's calculator before you break it.
Does the stress test treat fixed and variable the same way?
The formula is the same: the greater of the contract rate plus 2 percentage points or 5.25%. A lower contract rate produces a lower qualifying rate, until the floor. It does not produce a free pass. CMHC also calculates insured gross and total debt-service ratios at that qualifying rate.
Should I use the 6.09% posted rate as my fixed rate?
That 6.09% is the chartered-bank posted 5-year conventional rate on September 23, 2026. It is the sticker used in older qualifying rules and in many penalty formulas. The rate you are offered is a discount from a posted rate. Get the discounted rate, the size of the discount, and the posted rate the lender will use in an IRD, in writing.
Can I convert a variable mortgage to a fixed mortgage later?
Many lenders allow a conversion to a fixed term they are offering that day, sometimes without an interest-rate differential. The fixed rate you convert into is the rate then on offer, not the rate you wish you had locked. Confirm whether the conversion itself has a fee and whether the new term restarts the penalty clock.
How does this choice interact with a renewal?
At maturity you can usually move to either contract without a break fee, because the term is over. Before maturity, switching the type means breaking the old term. If the mortgage is an uninsured stand-alone loan and you are not borrowing more, the 2026 renewal guide explains when OSFI's prescribed qualifying rate does not apply. The penalty can still apply if you are early.
Sources
- Bank of Canada, September 2, 2026
- Bank of Canada Valet, September 23, 2026 readings
- OSFI minimum qualifying rate
- TD: how it describes IRD and three months' interest
- FCAC: prepayment penalties
The contract is a few years. The tax on the interest is the life of the loan.
Personal mortgage interest is not deductible. If you were comparing the payment with an investment return, do it after tax. The 2026 tax guide is that half of the worksheet.
Get the 2026 Tax Guide — $49 CAD
