Fixed vs Variable Rate Mortgages for Investors

Picking between a fixed rate and variable rate mortgage is one of the biggest decisions you’ll make as a homeowner or real estate investor. The good news? It’s not as complicated as it seems once you understand the key differences.

Let’s break down exactly what you need to know to make the right choice for your situation.

How Fixed Rate Mortgages Work

A fixed rate mortgage locks in your interest rate for a set period – usually anywhere from one to ten years, with five years being the most popular choice.

The main benefit is simple: you know exactly what you’re paying. Your rate stays the same no matter what happens with the economy or what the Bank of Canada decides to do. Your monthly payment never changes.

For people who need to know exactly what their budget will be every single month, this certainty can be worth a lot. If you’re the type who would lose sleep worrying about rate increases, a fixed rate gives you peace of mind.

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How Variable Rate Mortgages Work

Variable rate mortgages move up and down based on the prime rate set by the Bank of Canada. Here’s what most people don’t realize: historically, variable rates have almost always been cheaper than fixed rates.

The Bank of Canada doesn’t change rates overnight or make huge jumps. They review rates several times a year and typically move in small steps of 0.25% at a time. They’re careful because so many financial products – mortgages, car loans, credit cards, lines of credit – are tied to this rate.

Yes, your rate can go up. But it can also go down. And when rates drop, they usually fall faster than they rise.

The Real Cost Difference

Let’s look at actual numbers. When rates are low, you might see something like:

Variable rate: 4.75%
Five-year fixed rate: 4.99%

That difference might seem small, but it adds up over a full mortgage term. And if rates drop further, variable rate holders benefit immediately while fixed rate holders stay locked in.

According to historical data, a study tracking 25 years of mortgage rates found that variable rates were equal to or cheaper than fixed rates for all but seven months of that entire period. Over those 25 years, the average fixed rate was about 5.75% while the average variable rate was around 4.5%.

That 1.25% difference adds up to serious money over the life of a mortgage.

Penalties: The Game Changer

This is where things get really important, and where a lot of people make expensive mistakes.

Fixed Rate Penalties

If you need to break your fixed rate mortgage early, you’ll pay either three months of interest OR something called the Interest Rate Differential (IRD), whichever is higher. In most cases, it’s the IRD, and it can be huge.

The IRD calculation varies by lender and can easily run into tens of thousands of dollars depending on your mortgage size and how much time is left on your term.

Variable Rate Penalties

Variable rate mortgages keep it simple: three months of interest. That’s it.

This makes a massive difference if your life changes and you need to sell, refinance, or access your equity before your term is up.

Why This Matters More Than You Think

Here’s a critical fact: the average Canadian keeps their mortgage for only three and a half years before some life change means they need to refinance or make adjustments.

That’s less than the typical five-year term most people choose. Common reasons include:

Home renovations that require extra money
Debt consolidation to improve Cash Flow
Pulling equity for investment property down payments
Job changes or relocations
Divorce or family changes
Selling and upgrading sooner than planned

If you’re one of these people – and statistically, you probably will be – that lower variable rate penalty becomes extremely valuable.

Extra Benefits of Variable Rates

You Can Lock In Anytime

Most variable rate mortgages let you convert to a fixed rate whenever you want, with no penalty. If rates start climbing and you get nervous, just call your lender and lock in.

This should be a free service. If your lender tries to charge you for this basic feature, that’s a red flag.

But remember: this only works one way. Once you lock into a fixed rate, you can’t convert back to variable without refinancing and paying the penalty.

Better Prepayment Options

Variable rate mortgages typically let you prepay 15-20% of your original mortgage amount each year, compared to 10-15% for fixed rates.

If you get bonuses, inheritances, or have irregular income and want to pay down your mortgage faster, that extra 5% prepayment room can make a real difference.

When Fixed Rates Make Sense

Variable rates aren’t right for everyone. Consider a fixed rate if you:

Would genuinely lose sleep worrying about payment changes
Have zero budget flexibility and need to know your exact payment
Are absolutely certain you won’t move, refinance, or need to access equity
Value predictability over potential savings

There’s no shame in choosing peace of mind. If anxiety about rate changes would affect your quality of life, the premium you pay for a fixed rate might be worth it.

When Variable Rates Make Sense

Variable rates are the better choice if you:

Want the lowest possible payment
Are a real estate investor who needs flexibility
Aren’t sure how long you’ll keep the property
Have some budget cushion to handle modest payment changes
Want to pay down your mortgage aggressively
Value having easy access to refinancing without huge penalties

For real estate investors especially, variable rates are usually the smart play. You need the flexibility to sell, refinance, or take advantage of new opportunities without getting hammered by penalties.

A Smart Hybrid Strategy

If you want a fixed rate but also want flexibility, consider this approach:

Put your main mortgage at a fixed rate, but structure any extra equity as a home equity line of credit. This gives you the stability of fixed payments on your mortgage, but access to cash when you need it without triggering penalties.

This works great if you have more than 20% Down Payment and want to keep some powder dry for emergencies or opportunities.

The Bottom Line

Variable rates have historically been cheaper and offer way more flexibility with lower penalties. For most people – especially investors – they’re the better financial choice.

But if you’re someone who would genuinely worry and stress about rate changes, the peace of mind from a fixed rate might be worth paying extra.

The key is being honest with yourself about your situation, your timeline, and your temperament. There’s no universal right answer, but understanding the real differences between these options puts you in control of making the best decision for your circumstances.

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Frequently Asked Questions

What's the main difference between fixed and variable rate mortgages?

A fixed rate mortgage locks in your interest rate for the entire term, so your payment never changes. A variable rate mortgage moves up and down with the prime rate set by the Bank of Canada. Variable rates have historically been lower but can fluctuate over time.

How much does it cost to break a fixed rate mortgage?

You'll pay either three months of interest or the Interest Rate Differential (IRD), whichever is higher. The IRD is usually the bigger number and can cost tens of thousands of dollars depending on your mortgage size and remaining term.

What's the penalty for breaking a variable rate mortgage?

Variable rate mortgages have a simple penalty: three months of interest. This is much lower than the typical penalty for breaking a fixed rate mortgage, giving you more flexibility if your circumstances change.

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

Yes, most variable rate mortgages let you convert to a fixed rate anytime without penalty. This should be a free service from your lender. However, once you lock into a fixed rate, you can't convert back to variable without refinancing.

Which mortgage type is better for real estate investors?

Variable rates are usually better for investors because of the lower penalties and greater flexibility. Investors often need to sell properties, refinance, or access equity for new opportunities, and the three-month interest penalty makes this much easier and cheaper.

How long does the average person keep their mortgage?

The average Canadian keeps their mortgage for only three and a half years before refinancing or making changes, even though most people choose five-year terms. This makes the lower penalty structure of variable rates especially valuable.

Do variable rates always go up?

No, variable rates go both up and down. The Bank of Canada adjusts rates based on economic conditions, typically in small increments of 0.25%. When the economy needs help, rates can drop significantly. Historical data shows rates decrease faster than they increase.

When does a fixed rate mortgage make sense?

Fixed rates work best if you would lose sleep worrying about payment changes, have zero budget flexibility, are absolutely certain you won't need to refinance, or value peace of mind over potential savings. If anxiety about rate changes would affect your life, a fixed rate might be worth the premium.

Disclaimer: LendCity Mortgages is a licensed mortgage brokerage, and our team includes experienced real estate investors. While we are qualified to provide mortgage-related guidance, the broader financial, tax, and legal information in this article is provided for educational purposes only and does not constitute financial planning, tax, or legal advice. For matters outside mortgage financing, we recommend consulting a Chartered Professional Accountant (CPA), licensed financial planner, or qualified legal advisor.

Written by

LendCity

Published

December 22, 2025

Fixed vs Variable Rate Mortgages: Which Is Best for Investors?