Fixed vs Variable Mortgage in Ontario: How to Choose
The short answer
A fixed-rate mortgage keeps your rate and payment the same for the whole term, giving certainty and easy budgeting — but usually a higher break penalty. A variable-rate mortgage moves with your lender's prime rate: your rate (and often your payment) can rise or fall, with a typically smaller penalty and more flexibility. Fixed suits borrowers who value predictability or are stretched to qualify; variable suits those who can absorb payment swings and want flexibility. Both are qualified using the federal stress test.
Fixed rate vs Variable rate, at a glance
| Fixed rate | Variable rate | |
|---|---|---|
| Rate over the term | Locked — never changes | Moves with the lender's prime rate |
| Payment | Fixed and predictable | Can change (variable payment) or stay level with a shifting principal/interest split |
| Break penalty | Often the greater of 3 months' interest or IRD — can be large | Usually 3 months' interest — typically much smaller |
| If rates fall | You keep paying the higher locked rate unless you break (and pay a penalty) | Your interest cost falls automatically |
| If rates rise | You're protected for the term | Your rate/cost rises |
| Best for | Certainty, tight budgets, single-property owners | Flexibility, risk tolerance, likely to move or refinance |
The penalty difference most people miss
The headline rate isn't the whole story — the break penalty is where fixed and variable diverge most. If you break a fixed mortgage early, lenders charge the greater of three months' interest or the Interest Rate Differential (IRD), and on big-bank fixed mortgages the IRD can run into five figures. Variable mortgages almost always cap the penalty at three months' interest.
Because most Canadians don't keep a mortgage for its full term — they move, refinance, or restructure — the smaller variable penalty is a real, underrated advantage. If there's any chance you'll break the term early, factor the penalty into the decision, not just the rate.
The stress test applies either way
Whether you choose fixed or variable, federally regulated lenders qualify you at the higher of the mortgage-qualifying rate (the benchmark) or your contract rate plus two percentage points. That means the amount you can borrow isn't determined by picking the lower nominal rate — it's set by the stress test. Use a stress-test-aware affordability calculator so your pre-approval reflects what you'll actually qualify for.
How to actually decide
- Choose fixed if a rising payment would strain your budget, you're buying at the top of your range, or you simply sleep better with certainty.
- Choose variable if you can absorb payment increases, expect to move or refinance within the term, or want the smaller break penalty and the chance to benefit if rates fall.
- Consider a shorter fixed term as a middle ground when you expect conditions to change and don't want a long lock-in.
- Always compare the penalty math, prepayment privileges and portability — not just the rate — because those clauses decide your real cost if life changes.
Choose Fixed rate if…
- A higher payment would strain your budget
- You're buying near the top of your affordability
- You value certainty and set-and-forget budgeting
- You expect to keep the mortgage for the full term
Choose Variable rate if…
- You can comfortably absorb a higher payment if rates rise
- You may move, sell or refinance before the term ends
- You want the smaller three-months'-interest break penalty
- You want to benefit automatically if rates fall
Key takeaways
- Fixed = payment certainty but a potentially large IRD break penalty; variable = flexibility and usually a three-months'-interest penalty.
- Most borrowers don't keep a term to maturity, so the penalty difference matters more than people expect.
- The federal stress test qualifies you at contract rate + 2% (or the benchmark) regardless of which you pick.
- Compare prepayment privileges, portability and penalties — not just the headline rate.
Not sure which is right for you?
Frequently asked questions
Is a variable mortgage riskier than a fixed one?
It carries payment risk — your rate moves with prime, so costs can rise. But it usually has a much smaller break penalty and lets you benefit if rates fall. 'Riskier' depends on your budget cushion and how long you'll keep the mortgage.
What is the IRD penalty on a fixed mortgage?
The Interest Rate Differential is a way lenders calculate the cost of breaking a fixed term early, based on the gap between your rate and current rates for the remaining term. On big-bank fixed mortgages it can be much larger than three months' interest — the reason breaking a fixed mortgage early can be expensive.
Does the stress test apply to both fixed and variable?
Yes. Federally regulated lenders qualify you at the higher of the benchmark qualifying rate or your contract rate plus two percentage points, regardless of whether you choose fixed or variable.
Can I switch from variable to fixed later?
Most variable mortgages let you convert to a fixed rate mid-term without a penalty, though the fixed rate offered is the lender's current one. Confirm the conversion terms before signing.
Related comparisons
General information for Ontario, not legal, tax or financial advice. Figures describe how each option works, not current rates or prices. Confirm specifics with a licensed professional before you decide.