Fixed or variable: what actually decides it?

Fixed or variable does not change what you can borrow: both qualify at your rate plus 2 per cent or 5.25 per cent, whichever is higher. Here is what does.

Nobody can tell you where interest rates are going, so "will rates rise or fall" is the wrong place to start. Fixed or variable is a choice about which risk you would rather carry, and most of what decides it can be checked before you sign.

Does choosing fixed or variable change what you can borrow?

No. Both go through the same test. The Office of the Superintendent of Financial Institutions obliges federally regulated lenders to qualify most newly underwritten residential mortgages at a minimum qualifying rate of "the greater of the mortgage contract rate plus 2% or 5.25%". That rule reads off whatever rate you sign, fixed or variable, so choosing the lower advertised number does not buy you a bigger approval.

OSFI describes the 2 per cent as a buffer, "a safety margin that shows that borrowers can absorb some negative impacts to their finances", and the 5.25 per cent as a floor that "accounts for risks that can emerge from changes in the broader economy". One exemption applies at renewal: OSFI has removed the prescribed minimum qualifying rate for uninsured straight switches, meaning a move to a new lender with no increase to the loan amount or the amortization period. We walk through the test itself in how the mortgage stress test works in Canada.

What sets a fixed rate, and what sets a variable one?

Two different markets, which is why they do not move together. A variable rate moves with your lender's prime rate. The Bank of Canada explains that "changes in the policy interest rate lead to similar changes in short-term interest rates. These include the prime rate, which is used by the banks as a basis for pricing variable-rate mortgages." The Bank held its target for the overnight rate at 2.25 per cent on 2 September 2026, with the Bank Rate at 2.5 per cent, and named 28 October 2026 as the next scheduled announcement date.

A fixed rate is priced off what it costs the lender to raise money for a similar length of time. The Bank of Canada again: "The money that banks lend out comes from depositors and investors, both here in Canada and in other countries. So, funding cost is largely driven by the interest rates in these places", and "this funding cost makes up most of the interest rate on your mortgage." That is why a fixed quote can move in a week when the Bank has done nothing, which we covered in why fixed mortgage quotes are rising with the Bank on hold.

The practical consequence is that a variable rate reprices when the Bank acts, on eight fixed dates a year, and a fixed rate is set once for the length of your term no matter what happens in between.

If nobody can predict rates, what actually decides it?

Three questions you can answer today, none of which needs a forecast.

How much of a payment increase could you absorb? The Financial Consumer Agency of Canada sets the two out plainly. A fixed interest rate "stays the same for the entire term", and with it "your payments stay the same for the entire term". A variable interest rate "may increase and decrease during the term", and "typically, a variable interest rate is lower than a fixed interest rate for a similar term". That discount is the price of carrying the movement yourself. If a rise in the payment would put the household under real strain, the cheaper rate is being bought with a risk you cannot carry.

How likely are you to break the mortgage early? A job move, a separation, a growing family or a sale all end a term before its date, and breaking a closed mortgage costs money. Only your contract says how much.

Does your variable payment move, or stay the same? This is the one most people do not know they have chosen, and it is the subject of the next section.

What is a trigger rate, and why does it matter on a variable mortgage?

A trigger rate is the interest rate at which a mortgage only covers interest costs, and it only exists on a variable rate mortgage whose payment is fixed. It matters because reaching it takes the decision out of your hands.

Lenders call that product a fixed payment with a variable interest rate, and FCAC's warning about it is unusually direct. "A variable interest rate mortgage with fixed payments may be riskier than you expect. When interest rates rise, more of each payment automatically goes toward interest costs. You could end up in a situation where none of your payment goes toward paying down the principal. Instead of paying down your mortgage, the total amount you owe on your mortgage will increase." FCAC adds that you "may have to contribute more capital to avoid problems renewing your mortgage", and that acting early matters.

At the trigger point the decision moves to the lender. FCAC says financial institutions "may require consumers to either increase their payments, make additional payments to cover excess interest costs or change their mortgage to a fixed interest rate mortgage". The threshold is not a secret: the trigger point is listed in your mortgage contract.

The alternative is FCAC's other kind of variable. "You may also opt for an adjustable payment with a variable rate. With adjustable payments, the amount of your payment will change if the rate changes." That version has no trigger rate, because the payment moves instead of the amortization. Ask which of the two you are being offered, because both are sold as variable.

What does it cost to break a fixed or a variable mortgage?

Your contract decides that, not the label on the rate. FCAC is blunt about the size of it: "if you break your closed mortgage contract, you normally pay a prepayment penalty. This fee can cost thousands of dollars." An open mortgage "allows you to break the contract without paying a prepayment penalty" and carries a higher rate in exchange.

On a closed mortgage the charge "will usually be the higher of: an amount equal to 3 months' interest on what you still owe" or "the interest rate differential". FCAC says the lender will usually use the interest rate differential calculation if the interest rate on your mortgage is higher than the current interest rate and you signed the contract less than five years ago, and that the calculation may depend on the lender's posted rate rather than the discounted rate you actually pay. The two methods can be very far apart on the same balance, so ask in writing which one applies to the mortgage in front of you and which comparison rate is used.

Why is five years the longest term most lenders quote?

Because of a federal statute most borrowers have never heard of. Section 10 of the Interest Act says that where a mortgage is not payable until more than five years after its date, any person liable to pay may, after the five years have expired, pay the principal and interest owing "together with three months further interest in lieu of notice", and then "no further interest shall be chargeable, payable or recoverable". Subsection 10(2) excludes a mortgage given by "a joint stock company or any other corporation".

In plain terms, once you pass the five year mark on a longer term, your exit is capped at three months' interest by law. That cap is why terms beyond five years are rare and priced at a premium, and it is a reason the five year term is the Canadian default rather than a recommendation.

What should you ask before you sign?

Five questions, and the answers belong in writing.

• Is the payment on this variable rate fixed or adjusting, and if it is fixed, what is the trigger rate?
• How is the prepayment penalty calculated on this mortgage, and which comparison rate is used?
• What can I prepay each year without a charge?
• Can this variable rate be converted to a fixed rate during the term, on what terms, and at whose rate?
• Is this mortgage portable if we move, and is it assumable?

There is no version of this decision that removes risk. A fixed rate buys certainty on the payment and trades away flexibility on the exit. A variable rate is usually cheaper on the day and hands you the interest rate risk. Which of those you can live with is a question about your household rather than about the market, and it is worth running the payment both ways on our affordability calculator before you decide. If a renewal is what is driving this, we set out the options in what to do when a renewal payment jumps.