Posted On Feb 26, 2026
Fixed-Rate vs. Adjustable-Rate Mortgages: A Detailed Comparison for Homebuyers
When you are ready to buy a home in Canada, choosing your mortgage type is one of the biggest financial decisions you will face. Should you lock in a rate for peace of mind, or gamble on a fluctuating rate to potentially save money? In the 2026 market, understanding the mechanics of these two options is vital for your long-term financial health.
1. What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is exactly what it sounds like. Your interest rate is locked in for the entire duration of your term (typically three to five years in Canada).
- Predictability: Your principal and interest payments stay the same every single month.
- Protection: If the Bank of Canada raises interest rates, your payment will not change.
- Budgeting: This is the preferred choice for those on a tight monthly budget who dislike surprises.
2. What is an Adjustable-Rate Mortgage (ARM)?
In Canada, an adjustable rate mortgage (often called a variable rate) is tied to the lender’s prime rate. When the prime rate moves, your mortgage interest follows.
- Lower Starting Rates: Traditionally, variable rates start lower than fixed rates.
- Fluctuating Payments: In a true adjustable rate mortgage, your monthly payment amount will increase or decrease as interest rates change.
- Potential Savings: If rates drop over your five year term, you could pay significantly less in interest than someone in a fixed product.
3. Key Differences at a Glance
|
Feature |
Fixed-Rate Mortgage |
Adjustable-Rate Mortgage |
|
Payment Stability |
High (Never changes during term) |
Low (Changes with prime rate) |
|
Risk Level |
Low (Protected from hikes) |
Higher (Exposed to market shifts) |
|
Prepayment Penalties |
Often higher (based on IRD) |
Often lower (usually 3 months interest) |
4. What to Avoid When Choosing
Do not let "rate envy" cloud your judgment. Avoid these common mistakes:
- Ignoring the Stress Test: Remember that you must qualify at a higher rate regardless of which option you choose.
- Forgetting About Penalties: If you think you might sell your home before the term is up, a fixed rate mortgage often carries much higher "breaking" fees.
- Chasing the Lowest Number: A low adjustable rate looks great today, but ensure you have the "cash flow cushion" to handle a $200 or $300 monthly increase if rates climb.
FAQ: Navigating Your Mortgage Choice
1. Which mortgage type is better in a rising interest rate environment? Generally, a fixed rate is better when rates are climbing because it shields you from increased costs. However, if you believe rates have peaked and will soon drop, an adjustable rate might be more strategic.
2. Can I switch from an adjustable rate to a fixed rate later? Most Canadian lenders allow you to convert a variable or adjustable rate into a fixed rate during your term without a penalty, provided the new fixed term is equal to or longer than the time remaining on your current contract.
3. What is the "trigger point" in a variable mortgage? For some variable mortgages with fixed payments, a trigger point occurs if interest rates rise so much that your monthly payment no longer covers the interest. At this point, your lender will require you to increase your payment or make a lump sum contribution.