Key takeaways
- →Both fixed and variable mortgages qualify at the same OSFI minimum qualifying rate, so the stress test doesn't tip the decision — it just sets the ceiling both options have to clear.
- →Penalty exposure is asymmetric: breaking a variable mortgage typically costs three months' interest, while breaking a fixed mortgage can trigger a much larger interest rate differential (IRD) charge.
- →Most Canadian variable mortgages are the fixed-payment type, where a trigger rate — not the payment itself — is what eventually forces a change when rates rise.
- →The right frame for a client isn't “which rate is lower” — it's which combination of rate, penalty exposure, and payment-shock tolerance actually fits their five-year plan.
A client who opens with “should I go fixed or variable” is really asking a broker to predict the Bank of Canada's next move on their behalf. That's not a bet worth making out loud, and it's the wrong frame for the conversation regardless.
Here's a better structure: what actually differs between the two, why the stress test doesn't favour either one, why breaking one typically costs more than breaking the other, the adjustable-vs-fixed-payment nuance hiding inside “variable,” and how to walk a client to the answer that fits their own plan.
01 · What actually differs between a fixed-rate and a variable-rate mortgage?
A fixed-rate mortgage locks the interest rate for the full term — commonly one to five years — so the payment and the rate stay the same no matter what the Bank of Canada does to the overnight rate during that stretch.
A variable-rate mortgage is priced off the lender's prime rate, which moves whenever the Bank of Canada changes the overnight rate. What happens to the payment itself when prime moves depends on which type of variable mortgage the client actually holds — see our companion piece on ARM vs. VRM variable mortgages for that distinction in full.
02 · Does the stress test treat fixed and variable mortgages differently?
No. Both are qualified against the same minimum qualifying rate (MQR) under OSFI Guideline B-20 — the greater of the contract rate plus 2 percentage points, or 5.25%. See our stress test working reference for the formula worked through an example.
One exception worth flagging either way: since November 21, 2024, straight switches of an uninsured mortgage to a new federally regulated lender no longer require MQR requalification, as long as the loan amount and amortization don't increase. That change applies the same way whether a file is moving from fixed to variable, variable to fixed, or staying put.
03 · Why does breaking a variable mortgage usually cost less than breaking a fixed one?
Under the federal Code of Conduct governing mortgage prepayment disclosure, a lender must clearly explain how its penalty is calculated before a borrower signs. For most variable-rate mortgages, that calculation is three months' interest. For most fixed-rate mortgages, it's the greater of three months' interest or the interest rate differential (IRD) — and the IRD can be substantially larger, particularly mid-term on a longer fixed term when rates have fallen since origination.
| Mortgage type | Typical penalty calculation |
|---|---|
| Fixed-rate | Greater of 3 months' interest or the interest rate differential (IRD) |
| Variable-rate | Typically 3 months' interest only — no IRD calculation applies |
04 · Does it matter whether the variable mortgage is fixed-payment or adjustable-payment?
Briefly, yes. Most variable mortgages sold in Canada today are the fixed-payment type: the payment itself doesn't move when prime changes, but the split between principal and interest inside that payment does. Bank of Canada research on this structure identifies a trigger rate — the point at which the interest portion consumes the entire payment, leaving nothing for principal — as the mechanism that eventually forces a change, not the payment amount itself.
An adjustable-rate mortgage works differently: the payment itself moves directly with prime, so there's no trigger rate to reach. It's a smaller share of the Canadian market, but worth naming explicitly so a client knows which one is actually in front of them — the full mechanics are in ARM vs. VRM variable mortgages.
05 · How should a broker actually frame this decision for a client?
Skip the rate-spread pitch and start with the two things that actually differ: penalty exposure if the plan changes mid-term, and payment-shock tolerance if it doesn't. A client likely to move, refinance, or sell within the term should weigh the smaller variable penalty heavily; a client who wants a fixed monthly number for budgeting reasons is choosing certainty on purpose, not settling for it.
Neither option is the “safe” choice by default: Fixed removes rate risk and adds penalty risk; variable does the reverse. The client's actual plan for the term, not the current rate headline, is what should decide it.
That kind of side-by-side conversation takes real prep time on every file — time Treadstone's fulfillment associates free up by taking file processing and documentation off a broker's desk.
More prep time for the conversation that actually decides it
Spend the meeting on the client's plan, not the paperwork.
Treadstone's fulfillment associates take on file processing and documentation, freeing up the time a proper fixed-vs-variable conversation actually takes.
Frequently asked questions
This article is general information to help you scale — not a substitute for tailored advice on your specific business, licensing, or compliance obligations. All figures are illustrative examples for planning purposes; actual costs vary by province, market, and brokerage.