Fixed vs Variable Rate — Which to Choose in 2026?
Understand the differences between fixed and variable rates to make an informed choice based on your profile, risk tolerance, and current market conditions.
Current Rates: Where Things Stand in March 2026
The Bank of Canada’s policy rate currently sits at 2.75%, holding steady after a series of cuts since mid-2024. Variable mortgage rates hover around 4.00–4.40% (prime minus a discount), while 5-year fixed rates range from 3.99 to 4.14% depending on the lender and loan type (insured or conventional).
The spread between fixed and variable is unusually narrow in 2026. Historically, variable offered a significant discount relative to fixed. Today, with the yield curve in transition, the choice is more nuanced than ever.
How Each Rate Type Works
Fixed Rate
A fixed rate is locked for the entire duration of your term (typically 5 years in Quebec). Your monthly payment stays the same regardless of market fluctuations. Fixed rates are determined by the Canadian bond market (Government of Canada 5-year bonds), not directly by the Bank of Canada.
Variable Rate
A variable rate fluctuates with your lender’s prime rate, which closely follows the Bank of Canada’s policy rate. Your rate is typically expressed as ‘prime minus X%’ (e.g., prime − 1.00%). When the Bank of Canada adjusts its rate, your payment changes accordingly.
Penalties: The Most Important Difference
This is often the most underestimated difference between fixed and variable. The breakage penalty for a variable rate is straightforward: 3 months’ interest. For a fixed rate, it’s the greater of 3 months’ interest or the interest rate differential (IRD).
The IRD can be extremely costly. For example, on a $400,000 mortgage at 5.00% fixed with 3 years remaining, if current rates are 3.50%, the IRD penalty could exceed $15,000. The same mortgage on a variable rate would cost approximately $3,000 in penalty.
| Aspect | Fixed Rate | Variable Rate |
|---|---|---|
| Monthly payment | Stable and predictable | Fluctuates with the policy rate |
| Determined by | Bond market (5-year) | Bank of Canada policy rate |
| Breakage penalty | IRD (potentially $10,000+) | 3 months’ interest (~$3,000) |
| Protection against increases | Yes (for the term) | No |
| Benefits from decreases | No (locked in) | Yes (immediately) |
Bank of Canada Outlook
As of March 2026, the Bank of Canada is holding its policy rate at 2.75% after gradually lowering it from the peak of 5.00% reached in 2023. Inflation has returned near the 2% target, but the economy faces uncertainty related to trade tensions and sluggish growth.
Markets are pricing in one to two additional cuts in 2026. If these materialize, variable rate holders will benefit immediately, while fixed rates may also gradually decline in the bond market.
Quebec Context: A Fixed-Rate Culture
Quebec is the most conservative province when it comes to mortgage rates. Approximately 85% of Quebec mortgages are fixed-rate, compared to about 70% for Canada overall. This cultural preference for stability reflects a more pronounced risk aversion.
This caution comes at a cost: historically, variable rate holders have saved money in approximately 85% of 5-year periods in Canada. On a $400,000 mortgage over 25 years, the cumulative difference can represent $10,000 to $20,000 over the full amortization.
When to Choose Fixed
- Your budget is tight and a $200–300/month increase would be difficult to absorb
- You plan to keep your property for the full term (5 years)
- Economic uncertainty causes you financial stress
- You are a first-time buyer who prioritizes predictability
- Fixed rates are exceptionally low compared to historical averages
When to Choose Variable
- You have a comfortable financial cushion ($500/month buffer or more)
- You might sell or refinance before the end of your term (lower penalty)
- You believe rates will decline further in 2026–2027
- You accept volatility in exchange for potential savings
- Your goal is to minimize total cost over the full amortization
Risk Framework: 5 Questions to Ask Yourself
- If my payment increased by $300/month, could my budget handle it?
- How long do I plan to keep this property?
- Can I sleep well at night knowing my payment might change?
- What is my overall financial picture (debts, savings, plans)?
- Do I have an emergency fund equal to 3–6 months of expenses?
Historical Data: Variable Wins 85% of the Time
Studies by the Bank of Canada and Professor Moshe Milevsky (York University) have shown that the variable rate has been less expensive than fixed in approximately 85% of 5-year periods in Canada since the 1950s. The average savings are approximately 0.40 to 0.80% per year.
That said, the 15% of periods where fixed won included some of the most brutal rate hikes in history (1981, 2022–2023). Variable is statistically the winner, but not without risk. The choice ultimately depends on your ability to absorb fluctuations.
Frequently Asked Questions
Can I convert from variable to fixed during my term?
Yes, most lenders allow you to convert from variable to fixed at any time during your term, with no penalty. The fixed rate offered will be the one in effect at the time of conversion, not the one you would have received initially. It’s a useful safety net.
Is variable rate riskier in 2026?
Risk is relative. With the policy rate at 2.75% and potential cuts ahead, the upside risk is more limited than in 2022–2023. However, the narrowed spread between fixed and variable means the potential variable advantage is also more modest.
Will fixed rates continue to drop?
Fixed rates depend on the bond market, not directly on the Bank of Canada. If the economy slows and inflation stays controlled, fixed rates could gradually decrease. But an economic rebound or persistent inflation could maintain or push them higher.
Need Help Choosing?
Anthony King, mortgage broker in Montreal, analyzes your financial profile and goals to recommend the rate type best suited to your situation. Free consultation.