Fixed vs Variable Rate Commercial Mortgage in Canada: Which Should You Choose?

The choice between a fixed and variable rate commercial mortgage is one of the most consequential financing decisions you’ll make as a commercial property investor. Unlike residential mortgages — where the rate difference between fixed and variable might cost or save you a few hundred dollars per month — on a $5M commercial mortgage, the wrong rate structure can cost tens of thousands of dollars annually and create cash flow stress that threatens the viability of your investment.

Commercial fixed and variable rates work differently than their residential counterparts. They’re priced off different benchmarks, carry different prepayment penalty structures, and interact differently with lender underwriting requirements. Understanding these mechanics before you choose is essential.

This guide breaks down how each rate type works in the Canadian commercial mortgage market, when each one makes the most sense, and how to evaluate the trade-offs for your specific deal.

How Fixed Rates Work for Commercial Mortgages

The Pricing Mechanism

Commercial fixed rates in Canada are priced off Government of Canada bond yields — specifically, the bond with a maturity closest to your mortgage term. If you’re taking a 5-year fixed commercial mortgage, your rate is derived from the 5-year Government of Canada bond yield plus a spread.

That spread reflects several factors:

• The lender’s cost of funds and profit margin
• The credit risk associated with the borrower and property
• The property type (multi-family gets tighter spreads than office or retail)
• The loan-to-value ratio (lower LTV gets tighter spreads)
• Market conditions and competitive dynamics

Typical spread structure:

Component	Example
5-year GoC bond yield	3.50%
Lender spread	+1.75%
Quoted fixed rate	5.25%

The spread above the bond yield ranges from approximately 1.25% to 3.00% depending on the deal characteristics. CMHC-insured multi-family mortgages receive the tightest spreads. Higher-risk deals — office with short lease terms, retail with vacancy, properties in secondary markets — receive wider spreads.

Swap Rate Pricing

Some institutional lenders, particularly life insurance companies and Schedule B banks, price fixed commercial mortgages using interest rate swap rates rather than bond yields directly. The swap rate is essentially the fixed rate that the lender can lock in through the derivatives market to match against your mortgage.

In practice, swap rate pricing and bond-yield pricing produce similar results because swap rates track bond yields closely. The distinction matters primarily when negotiating with institutional lenders, because understanding their pricing mechanism gives you leverage to discuss spreads more precisely.

What Fixed Rate Locks In

When you commit to a fixed rate commercial mortgage, the following elements are determined for the term:

• Interest rate — Does not change regardless of Bank of Canada policy or bond market movements
• Monthly payment — Remains constant (assuming standard amortizing structure)
• Debt service coverage ratio impact — Lenders calculate DSCR using the fixed rate, providing certainty
• Prepayment penalty basis — Fixed rates typically trigger yield maintenance or defeasance penalties if you break the mortgage early

Fixed Rate Term Options

Commercial fixed rate terms in Canada are available in several standard durations:

Term	Availability	Typical Use Case
1 year	Limited	Short-term bridge situations
3 years	Moderate	Medium-hold investors who want partial certainty
5 years	Most common	Standard commercial term — best rate selection
7 years	Available from institutional lenders	Longer-hold properties with stable tenants
10 years	Available from life companies and CMHC	Long-term holds, institutional-quality assets
15–25 years	CMHC only	Fully amortizing CMHC multi-family

The 5-year fixed term dominates Canadian commercial lending. It balances rate certainty against reasonable prepayment flexibility and aligns with most investment holding periods.

How Variable Rates Work for Commercial Mortgages

The Pricing Mechanism

Commercial variable rates in Canada are typically priced as prime rate plus (or minus) a spread. The prime rate is set by each lender and generally tracks the Bank of Canada’s overnight rate with a conventional 2.20% markup.

Typical variable rate structure:

Component	Example
Lender’s prime rate	5.95%
Spread	+0.75%
Quoted variable rate	6.70%

Variable rate spreads for commercial mortgages range from prime minus 0.25% for the strongest deals to prime plus 2.00% or more for higher-risk transactions.

Bankers’ Acceptance (BA) Rate Pricing

Some commercial lenders, particularly in the institutional space, price variable rate mortgages off the Bankers’ Acceptance (BA) rate rather than prime. The BA rate is a wholesale funding rate that tends to track the Bank of Canada rate more closely than prime, which can include discretionary lender markups.

BA-based pricing typically works as:

Component	Example
3-month BA rate	4.50%
Lender spread	+1.75%
Stamping fee	+0.25%
Effective variable rate	6.50%

BA-based pricing often results in a slightly lower effective rate than prime-based pricing, but the rate resets periodically (typically monthly or quarterly) based on the BA rate at each reset date.

How Variable Rates Change

When the Bank of Canada adjusts its overnight rate:

1. Most lenders adjust their prime rate within days
2. Your variable rate adjusts by the same amount as the prime rate change
3. Your monthly payment may or may not change immediately — some variable rate commercial mortgages have fixed payments with the variable allocation between principal and interest, while others adjust payments with each rate change

The payment adjustment mechanism matters significantly for cash flow planning. Ask your lender explicitly how payment changes work before committing to a variable rate.

Fixed vs Variable: Comprehensive Comparison

Factor	Fixed Rate	Variable Rate
Rate basis	GoC bond yield + spread	Prime rate + spread (or BA + spread)
Payment certainty	Complete for entire term	Changes with Bank of Canada decisions
Starting rate	Typically higher	Typically lower
Rate risk	None during term	Full exposure to rate increases
Prepayment penalty	Yield maintenance or defeasance (expensive)	3 months’ interest (modest)
DSCR underwriting	Straightforward — fixed rate used	May be stress-tested at higher rate
Cash flow planning	Predictable	Requires budgeting for rate increases
Break cost if sold	Can be $100K–$500K+ on larger mortgages	Typically $20K–$75K on same mortgage
Best for	Long-term holds, stable tenants, rising rate environment	Short holds, declining rate environment, value-add
CMHC availability	Yes — full CMHC terms	Yes — but fixed is more common for CMHC

Prepayment Penalties: The Critical Difference

The most consequential practical difference between fixed and variable commercial mortgages is the prepayment penalty structure. This difference alone should drive the decision for many investors.

Fixed Rate Prepayment: Yield Maintenance

Most fixed rate commercial mortgages in Canada use yield maintenance as the prepayment penalty. Yield maintenance is designed to make the lender financially whole — as if you had never broken the mortgage.

How yield maintenance works:

The penalty equals the present value of the interest rate differential between your contracted rate and the current market rate, applied to the remaining mortgage balance for the remaining term.

Simplified example:

Factor	Value
Remaining mortgage balance	$5,000,000
Contracted fixed rate	6.00%
Current market rate for remaining term	4.50%
Rate differential	1.50%
Remaining term	3 years
Approximate annual differential	$75,000
Present value of 3 years of differential	~$210,000

In a falling rate environment, yield maintenance penalties can be enormous. The greater the rate decline since you locked in, the larger the penalty. Conversely, if rates have risen since you locked in, yield maintenance can approach zero — because the lender can redeploy the capital at a higher rate.

Fixed Rate Prepayment: Defeasance (CMHC)

CMHC-insured commercial mortgages that have been securitized into Canada Mortgage Bond pools use defeasance rather than yield maintenance. Defeasance requires the borrower to purchase Government of Canada bonds that replicate the remaining cash flows of the mortgage, effectively replacing the mortgage with risk-free securities.

Defeasance is typically more expensive than yield maintenance and involves significant legal and administrative costs. Budget $50,000 to $100,000 in transaction costs alone, on top of any rate differential.

Variable Rate Prepayment: Three Months’ Interest

Variable rate commercial mortgages typically carry a three months’ interest prepayment penalty. On a $5M mortgage at 6.50%, this penalty is approximately $81,250 — a fraction of what yield maintenance or defeasance would cost.

This is the single most important reason to choose variable rate if you may sell, refinance, or restructure within the mortgage term. The flexibility to exit a variable rate mortgage at a predictable, manageable cost gives you strategic options that fixed rate borrowers simply don’t have.

Some variable rate commercial mortgages are fully open (no penalty) after an initial closed period of 1 to 3 years. These provide maximum flexibility at the cost of a slightly higher rate or spread.

Impact on DSCR Underwriting

The rate type you choose affects how lenders calculate your Debt Service Coverage Ratio, and DSCR is the primary metric that determines whether your commercial mortgage qualifies.

Fixed Rate DSCR

Lenders calculate DSCR using the actual fixed rate you’ll be paying. If your contracted rate is 5.50%, the annual debt service is calculated at 5.50% for the full term. No additional stress test is applied to the rate itself.

This creates certainty: your qualifying DSCR is also your actual operating DSCR. If the property qualifies at underwriting, it will continue to meet lender requirements throughout the term (assuming NOI remains stable).

Variable Rate DSCR

Variable rate DSCR calculations are more complex. Many lenders apply one or both of these approaches:

Qualifying at a stress-tested rate. Some lenders calculate DSCR using the variable rate plus a buffer (typically 100 to 200 basis points) to ensure the property can service the debt even if rates increase. If your variable rate is 6.00%, the lender may qualify you at 7.00% or 8.00%.

Qualifying at the greater of variable or floor rate. Some lenders set a minimum qualifying rate (floor rate) regardless of the current variable rate. This ensures that declining rates don’t allow overleveraged deals to qualify.

The practical impact: variable rate mortgages may require stronger DSCR at origination, which can mean lower LTV or higher NOI requirements. Calculate your DSCR under both rate scenarios using the DSCR calculator before choosing a rate type.

CMHC Fixed Rate Advantages

CMHC-insured commercial mortgages are overwhelmingly originated as fixed rate products. While variable rate CMHC financing exists, the program’s greatest advantages align naturally with fixed rate structures.

Why Fixed Dominates CMHC Lending

Extended amortization amplifies fixed rate benefits. CMHC offers 40 to 50-year amortization on certain programs. At these extended amortization periods, the monthly payment reduction is dramatic — but it also means a larger proportion of each payment goes to interest in the early years. Locking in a lower fixed rate magnifies the cash flow benefit of extended amortization.

Rate stability supports underwriting. CMHC’s own underwriting uses the contracted fixed rate. This simplifies the approval process and provides certainty that the deal meets CMHC criteria throughout the term.

Lower rates than conventional fixed. CMHC-insured fixed rates are typically 50 to 100 basis points below conventional commercial fixed rates. This rate advantage, combined with higher LTV and longer amortization, makes CMHC fixed rate the most powerful tool for multi-family mortgage financing in Canada.

Long-term rate locks. CMHC programs offer fixed terms up to 25 years — far beyond what any conventional commercial lender provides. For investors building long-term rental portfolios, a 10 or 15-year fixed CMHC rate eliminates interest rate risk entirely for a generation.

When Fixed Rate Makes Sense

Long-Term Hold Strategy

If you’re acquiring a stabilized commercial property with the intention of holding for 10+ years, fixed rate financing provides certainty that supports long-range financial planning. You know exactly what your debt service will be, which means you know your minimum cash flow and can plan capital expenditures, distributions, and reinvestment accordingly.

Stable, Predictable Tenancy

Properties with strong tenants on long-term leases — national retailers, government agencies, institutional users — generate predictable NOI. Matching that predictable income with a fixed rate creates a fully predictable cash flow profile. This is particularly valuable for properties held in structures where investors expect consistent distributions.

Rising Rate Environment

When interest rates are low or are expected to rise, locking in a fixed rate protects against future increases. This is the conventional wisdom, and it’s correct in principle — though timing rate movements is notoriously difficult, even for professional rate strategists.

Conservative Risk Profile

Some investors simply prefer the certainty of fixed payments regardless of rate direction. There’s nothing wrong with paying a modest premium for predictability if that certainty allows you to sleep at night and make better long-term decisions.

CMHC Multi-Family Acquisitions

As discussed above, CMHC-insured multi-family financing is most effective as a fixed rate product. The combination of below-market fixed rates, extended amortization, and high LTV creates the most advantageous financing available in Canadian commercial lending.

When Variable Rate Makes Sense

Short to Medium-Term Hold

If your investment thesis involves selling, refinancing, or repositioning within 2 to 5 years, variable rate financing gives you exit flexibility that fixed rate cannot match. The three months’ interest prepayment penalty versus yield maintenance or defeasance can save hundreds of thousands of dollars when you exit.

Value-Add Strategy

Value-add commercial investments — where you acquire a property below market, improve it, and refinance at a higher valuation — are inherently short to medium-term in the financing phase. Variable rate financing during the value-add period lets you refinance into permanent financing (potentially fixed rate) once the property is stabilized, without prohibitive prepayment costs.

Declining Rate Environment

When interest rates are high and expected to decline, variable rate lets you benefit from rate reductions without refinancing. Each Bank of Canada rate cut translates directly into lower debt service, improving cash flow without any action on your part.

Portfolio Flexibility

Investors managing multiple commercial properties may choose variable rate on some or all mortgages to maintain strategic flexibility. If a better acquisition opportunity emerges, you can restructure or repay variable rate mortgages to access equity without punitive penalties.

Bridge to Permanent Financing

Variable rate is the natural choice for interim financing situations — pre-development, lease-up periods, renovation phases — where the property will transition to permanent fixed rate financing once stabilized.

Hybrid and Alternative Structures

Capped Variable Rate

Some lenders offer variable rate mortgages with an interest rate cap — a maximum rate that the mortgage cannot exceed regardless of prime rate increases. This provides downside protection while retaining the flexibility advantages of variable.

Capped variable products are relatively uncommon in Canadian commercial lending but available from some credit unions and Schedule B banks. The cap typically costs 25 to 50 basis points in additional spread.

Convertible Mortgages

Certain commercial lenders offer variable rate mortgages with a conversion option — the right to convert to a fixed rate at a specified point during the term. The conversion rate is typically the lender’s posted rate at the time of conversion.

Convertible options are most commonly available from credit unions and portfolio lenders who hold their own mortgages rather than securitizing. The conversion option provides a safety valve if rates rise unexpectedly.

Split Financing

For larger commercial deals, some borrowers negotiate a split structure — a portion of the debt at fixed rate and a portion at variable. This hedges interest rate risk while maintaining some flexibility and potentially lowering the blended rate.

Example split structure:

Tranche	Amount	Rate Type	Rate	Purpose
Tranche A	$3,000,000	5-year fixed	5.50%	Core debt — certainty
Tranche B	$2,000,000	Variable	Prime + 0.75%	Flexible component
Total	$5,000,000	Blended	~5.60%	Partial hedge

Split structures are typically available only from lenders offering both products and willing to hold the full relationship. Discuss this option with your broker or directly with relationship-oriented lenders like credit unions.

Historical Rate Context

Understanding how fixed and variable commercial rates have performed historically provides context for current decisions — though past performance is never a reliable predictor of future rate movements.

Key Historical Observations

Variable has historically been cheaper over full cycles. Across multiple interest rate cycles in Canada, borrowers who chose variable rate commercial mortgages have, on average, paid less in total interest than those who chose fixed. This reflects the yield curve premium — fixed rates include a term premium that compensates the lender for locking in a rate, and that premium has historically exceeded the cost of variable rate fluctuations.

Fixed provided the most value in periods of unexpected rate increases. Borrowers who locked in fixed rates before the 2022–2023 rate tightening cycle saved significantly compared to those on variable. Fixed rate also outperformed during the 2017–2018 tightening cycle.

The rate spread between fixed and variable varies considerably. In normal yield curve environments, 5-year fixed rates are 50 to 150 basis points above variable rates. In inverted yield curve environments, the relationship can reverse — variable rates can actually exceed fixed rates. The current spread should factor into your decision.

Rate movements are difficult to predict. Professional economists and rate strategists have inconsistent records predicting rate movements even 12 months out. Making rate type decisions based on rate predictions introduces significant uncertainty. Focus on which structure best serves your specific investment strategy rather than trying to guess rate direction.

Making the Decision: A Framework

Rather than trying to forecast interest rates, use this framework based on your investment characteristics:

Choose Fixed If:

• Your hold period aligns with the mortgage term (5+ years)
• The property has stable, long-term tenants and predictable NOI
• You’re using CMHC insurance for multi-family
• Cash flow certainty is essential for your investment structure
• You have no plans to sell, refinance, or restructure during the term
• The current fixed-variable spread is narrow (less than 75 basis points)

Choose Variable If:

• Your hold period is shorter than the mortgage term
• You plan to sell, refinance, or restructure within 2 to 5 years
• The property is in a value-add or transitional phase
• You want maximum flexibility to respond to opportunities
• The current fixed-variable spread is wide (more than 100 basis points)
• You can absorb potential rate increases without cash flow stress

Consider Hybrid If:

• Your deal is large enough to support split financing ($5M+)
• You want partial rate protection without full fixed rate commitment
• Your hold period is uncertain

Working With a Broker on Rate Strategy

A mortgage broker experienced in commercial mortgage financing can provide significant value when evaluating fixed versus variable options:

• Access to current commercial mortgage rates across multiple lenders — the rate environment changes frequently, and the best option today may differ from last month
• Understanding of prepayment penalty calculations and real-world cost scenarios
• Knowledge of which lenders offer hybrid, capped, or convertible structures
• Ability to model DSCR under both fixed and variable scenarios for your specific deal
• Historical perspective on how similar deals have performed under different rate structures

Get Rate Strategy Advice for Your Deal

Frequently Asked Questions

Can I switch from variable to fixed rate during my commercial mortgage term?

Only if your mortgage includes a conversion option, which must be negotiated at origination. Without a conversion clause, switching from variable to fixed requires breaking the existing mortgage (with applicable penalty) and originating a new one. Some credit unions and portfolio lenders offer convertible products — ask specifically about this feature before closing. If conversion is available, the fixed rate offered at conversion will be the lender’s current posted rate, not the rate you would have received at original closing.

How much does yield maintenance cost compared to the three months' interest penalty?

The difference can be dramatic. On a $5M mortgage with 3 years remaining, if rates have dropped 1.5% since origination, yield maintenance can cost approximately $200,000 to $250,000. The three months’ interest penalty on the same variable rate mortgage would be roughly $80,000 to $100,000. In a rising rate environment, yield maintenance can approach zero while three months’ interest remains constant. The magnitude of the difference depends on rate movements and remaining term — larger rate drops and longer remaining terms create the biggest disparity.

Do lenders stress-test variable rate commercial mortgages the same way OSFI requires for residential?

OSFI’s residential mortgage stress test (qualifying at the greater of contracted rate plus 2% or the benchmark rate) does not formally apply to commercial mortgages. However, many commercial lenders apply their own stress tests to variable rate applications. These typically involve qualifying at the contracted variable rate plus 100 to 200 basis points. The specific stress test varies by lender and is not standardized across the industry. Ask each lender about their variable rate qualifying criteria.

Is the Bank of Canada rate the same as the commercial variable mortgage rate?

No. The Bank of Canada sets the overnight target rate, which influences but does not equal commercial variable rates. Most commercial variable rates are set as prime rate plus or minus a spread. The prime rate typically sits 2.20% above the overnight rate, and your spread adds or subtracts from prime. So if the overnight rate is 4.00%, prime is approximately 6.20%, and your commercial variable rate might be 6.95% (prime + 0.75%). Bank of Canada rate changes flow through to your variable rate, but your actual rate is always higher than the overnight rate.

Can I negotiate the spread on a commercial fixed or variable rate?

Yes. Unlike residential mortgages where rates are somewhat standardized, commercial mortgage rates are almost entirely negotiable. The spread above the benchmark (bond yield for fixed, prime for variable) reflects the lender’s assessment of your deal’s risk. Strong deals — low LTV, high DSCR, quality tenants, experienced borrower — command tighter spreads. Working with a mortgage broker who can present your deal to multiple lenders creates competitive pressure that typically results in tighter spreads than approaching a single lender directly.

What happens to my variable rate commercial mortgage if the Bank of Canada raises rates significantly?

Your rate increases by the same amount as each Bank of Canada rate hike, which directly increases your debt service. If rates rise enough, your property may breach DSCR covenants in your loan agreement, which could trigger lender intervention — typically a requirement to pay down principal, increase reserves, or provide additional security. Before choosing variable, model scenarios where rates increase 200 to 300 basis points above current levels. If your deal survives that stress test with adequate cash flow, variable may be appropriate. If it doesn’t, fixed provides important protection.

Matching Rate Type to Your Commercial Strategy

The fixed versus variable decision isn’t about predicting where interest rates are heading — it’s about matching your financing structure to your investment strategy. Long-term holders with stable properties benefit from fixed rate certainty. Active investors who buy, improve, and sell or refinance benefit from variable rate flexibility. And investors with large enough deals can use hybrid structures to capture elements of both.

Whatever you choose, understand the prepayment implications before you sign. The rate you pay each month matters, but the cost to exit the mortgage when your strategy requires it can dwarf years of rate savings.

Discuss Your Rate Options With LendCity

Ready to compare fixed and variable options for your specific commercial deal? Book a strategy call with LendCity and we’ll model both rate scenarios against your property’s financials, prepayment implications, and investment timeline to recommend the optimal structure.