Variable-rate mortgages are a flexible option for Canadian homebuyers who are comfortable with some risk in exchange for potential savings. Unlike fixed rates, variable-rate mortgages can fluctuate with the lender’s prime rate, which means your interest rate — and possibly your monthly payment — may change during your term.

For borrowers who can handle the ups and downs, they offer the chance to pay less interest when rates fall.

Here’s what you need to know about variable-rate mortgages in Canada.

What is a variable-rate mortgage?

A variable-rate mortgage is a home loan where your interest rate can fluctuate over time, depending on changes to your lender’s prime rate. Your rate is typically expressed as prime minus (or plus) a set percentage. For example, if your mortgage rate is prime – 0.75% and the prime rate is 6.95%, your rate would be 6.20%.

Variable rates generally start lower than fixed rates, but they carry more risk because your rate — and potentially your monthly payment — can increase.

How do variable-rate mortgages work?

There are two main types of variable-rate mortgages:

• Adjustable-rate mortgages (ARM): Your payment changes when the prime rate changes, so your payment size fluctuates based on interest rate movements.
• Variable-rate with fixed payments: Your payment stays the same even if the rate changes. If rates go up, more of your payment goes toward interest. If they go down, more goes toward principal.

In both cases, the interest cost changes with the prime rate, which is influenced by the Bank of Canada’s policy rate.

Why choose a variable rate?

Here are some of the potential benefits:

• Lower initial rates: Variable rates often start lower than fixed rates.
• Potential savings: If rates fall, your interest costs can drop — and your amortization can shrink if payments are fixed.
• Flexibility: Variable-rate mortgages often come with lower penalties for breaking the mortgage early.

What are the risks?

• Unpredictability: Your payments or interest costs can rise if rates go up.
• Stress test: Even though the starting rate is lower, you’ll need to qualify using a higher rate — usually the greater of your rate plus 2% or the Bank of Canada’s qualifying rate.

Variable-rate mortgages are best suited to borrowers who can handle fluctuations in interest rates or who plan to refinance or sell within a few years.

Should you go variable or fixed?

The decision depends on your risk tolerance, financial goals, and expectations for future interest rates. In times of falling or stable rates, variable mortgages can offer savings — but in rising-rate environments, fixed-rate mortgages offer peace of mind.

Not sure which is right for you? A mortgage broker can help you compare the pros and cons based on your personal situation.

Last modified: March 26, 2025