Fixed vs. Variable Mortgage in Ontario: The Definitive Guide for Home Buyers

The moment you find the perfect home in Ontario, your mind quickly shifts from paint colours to payments. Amidst the paperwork, one question stands out as arguably the most critical: Should I choose a fixed vs. variable mortgage rate?

For Ontario home buyers navigating the country’s most expensive housing markets, this isn’t just a technical detail. It’s the $100,000 question that can define your financial future, potentially saving or costing you tens of thousands of dollars over your mortgage term.

The debate is fierce, but the right answer is entirely personal. We’re breaking down the pros, cons, and historical performance of the fixed vs. variable choice so you can make a smart, informed decision for your new home.

The Allure of Predictability: Fixed-Rate Mortgages

A fixed-rate mortgage is the choice that offers a financial safety net. It’s the most common option in Canada for a reason: it eliminates uncertainty.

What is a Fixed-Rate Mortgage?

With a fixed-rate mortgage, your interest rate is locked in and remains the same for the entire duration of your mortgage term (typically 3-5 years). This rate is primarily influenced by the performance of the Government of Canada bond yields.

The Pros: Peace of Mind and Budgeting Ease

• Predictable Monthly Payments: Your payment amount will not change, regardless of what happens with the economy or the Bank of Canada. This makes long-term financial planning and monthly budgeting incredibly easy.
• Protection from Rate Spikes: If inflation soars and interest rates climb, your rate remains stable. You are completely insulated from sudden, unexpected increases in your carrying costs. This is the definition of “rate insurance.”
• Ideal for First-Time Buyers: If your budget is already tight, the stability of a 5-year fixed rate offers a solid foundation, minimizing stress as you adjust to new homeownership costs.

The Cons: The Cost of Peace and Hefty Penalties

• The Premium: Historically, fixed rates are typically higher than variable rates at the time you sign. You pay a “premium” for the peace of mind.
• No Benefit from Rate Drops: If the Bank of Canada decides to lower its rates, you are locked into your higher rate and cannot take advantage of the savings unless you break your mortgage.
• High Prepayment Penalties: This is the biggest risk. If you need to break your closed fixed-rate mortgage early (e.g., to sell your home, refinance, or switch lenders), the penalty is usually the Interest Rate Differential (IRD) or three months’ interest, whichever is greater. The IRD can often amount to tens of thousands of dollars.

The Potential for Savings: Variable-Rate Mortgages

A variable-rate mortgage is for the home buyer who is willing to take on some risk for the potential of greater reward and flexibility.

What is a Variable-Rate Mortgage?

A variable-rate mortgage fluctuates based on the lender’s Prime Rate, which is directly influenced by the Bank of Canada’s overnight rate. If the Bank of Canada raises or lowers its rate, your variable mortgage rate adjusts accordingly.

There are two main types:

1. Adjustable-Rate Mortgage (ARM): Your monthly payment changes when the Prime Rate changes.
2. Fixed-Payment Variable-Rate Mortgage (VRM): Your monthly payment stays the same, but the amount that goes toward principal vs. interest changes. The risk here is hitting a trigger rate, where your payment no longer covers the interest portion if rates rise too high.

The Pros: Flexibility and Historical Long-Term Value

• Historically Lower Rate: When you look at a chart of fixed and variable rates for the last 25 years, variable is still much cheaper on average. That doesn’t guarantee it will be cheaper moving forward.
• Lower Exit Penalties: If you need to break your variable mortgage, the penalty is almost always just three months of interest. This significantly reduces the financial risk if you expect to move, switch lenders, or refinance before your term is up.
• Conversion Flexibility: Most lenders allow you to convert, or “lock in,” your variable mortgage rate to a fixed rate at any time (at the current prevailing fixed rates), with no penalty.

The Cons: Budget Uncertainty and Stress

• Unpredictable Payments: Your payments can increase dramatically if the Bank of Canada raises its rates multiple times. This is the main reason many risk-averse individuals choose fixed rates. We saw this happen between 2022 and 2024, but that was a historical anomaly caused by financial policies implemented during the pandemic.
• Budget Strain: If you don’t have enough wiggle room in your monthly budget, a sudden payment increase can put significant strain on your finances.
• The “Trigger Rate” Risk (for VRMs): If rates climb high enough, you may be forced to make a lump-sum payment or increase your scheduled payments immediately to avoid negative amortization.

The Historical Context: What the Data Tells Us

The best way to evaluate the fixed vs. variable argument is to look beyond fear and focus on facts. Over the long term, which rate structure typically saves Canadian borrowers more money?

Analyzing 25 Years of Interest Rate Movement

If you look at historical data, such as the comparison of average residential mortgage lending rates from our provided CMLS source, a clear trend emerges: variable rates have, over time, been the cheaper option in the majority of 5-year terms.

The math often shows that even the savings gained during periods of falling or stable rates are enough to offset the temporary increases experienced during rate hike cycles.

The Insight: Choosing a variable rate means betting that the accumulated savings from having a lower rate for most of the term will be greater than the occasional costs of rate hikes. History suggests this has been a smart bet for the majority of borrowers over the last few decades.

How to Choose: A Decision Framework for Ontario Home Buyers

This decision is about more than just the current rates; it’s about your personal finances and your comfort level. Use this three-step framework to determine if fixed vs. variable is right for you.

Step 1: Assess Your Financial Risk Tolerance

Scenario	Consider this rate type	Rationale
Budget is Tight/Risk Averse	Fixed Rate	You need stability. You cannot afford a sudden $200-$400 increase in your monthly payment without significant strain.
Financial Cushion/Risk Tolerant	Variable Rate	You have savings or income that can easily absorb a 1% to 2% rate hike, and you prioritize long-term interest savings.

Step 2: Consider Your Short-Term Plans

Scenario	Consider this rate type	Rationale
Staying Put (5+ Years)	Fixed or Variable	Stability is valued, but history favours variable for long-term savings.
Likely to Sell/Refinance Early	Variable Rate	The minimal 3-month interest penalty is a massive advantage over the potentially crippling IRD penalty of a fixed rate.

Step 3: Factor in the Current Rate Environment

Scenario	Consider this rate type	Rationale
Rates are High & Expected to Fall	Variable Rate	You benefit immediately from the first Bank of Canada rate cut and can lock in a better fixed rate later if desired.
Fixed and Variable Rates are Close	Fixed Rate	If the “premium” for fixed is small (e.g., less than 0.25%), the stability may be worth the marginal difference.

Conclusion: Making Your Final Mortgage Choice

The debate between a fixed vs. variable mortgage is a classic one, and there is no single right answer for every Ontario home buyer. This is what Joel Arndt and his team at Sherwood Mortgage Group are here to help you with.

If you value predictability, stability, and peace of mind above all else, the fixed rate provides an ironclad budget.

If you are comfortable with risk, have a financial cushion, and value long-term savings potential, the variable rate has historically proven to be the most cost-effective path.

Ultimately, your best strategy is to take this information to a qualified, independent Ontario Mortgage Agent. We can run the exact numbers for your situation, factor in the latest rates, and help you select the option that aligns with your financial goals and your comfort level.