Fixed vs Variable: Which Mortgage Rate Should You Lock in Ontario in 2026?
Policy rate 2.25%, prime 4.45% — but "which is lower right now" isn’t the point. Penalties, the stress test, and your tolerance for swings are.
What’s the difference between fixed and variable rates, and which should I pick in 2026?
A fixed rate is locked for the entire mortgage term; a variable rate floats with the lender’s prime rate, which in turn follows the Bank of Canada’s policy rate. Per the Bank of Canada, the policy rate in June 2026 is 2.25% (held for a fifth consecutive time on June 10), with prime around 4.45%. But “which number is lower today” usually isn’t the deciding factor — the real difference is: fixed gives you certainty but its break penalty can be steep; variable’s payment can move but its prepayment penalty is usually far smaller. Either way, you must qualify under the stress test (the higher of contract rate + 2% or 5.25%).
Sources: Bank of Canada, "Policy interest rate" (bankofcanada.ca; held at 2.25% on 2026-06-10); OSFI stress-test rules. Rates are point-in-time and change with each Bank decision.
“Arthur, should I lock in fixed or go variable?” Almost every buyer asks this — and most are really asking “which number is lower right now.” That, I have to say, is exactly the question that leads people astray. Which rate is lower will change; the structural differences between the two products — certainty, payment volatility, and the easily-overlooked break penalty — are what actually decide whether you’re comfortable or burned a few years out. Here’s the difference, the night-and-day gap in penalties, the stress test, and who suits which — so you choose for your situation instead of betting on rates.
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First, how each one works
Fixed rate: you lock a rate at signing and it stays put for the whole term (commonly 5 years), with a fixed payment. Central-bank hikes and cuts don’t touch you — maximum certainty. Variable rate: your rate = the lender’s prime rate ± a fixed spread; prime follows the Bank of Canada’s policy rate, so when the Bank moves, your rate moves. Variable comes in two flavours: fixed payment but a shifting principal/interest split (VRM), and payment that changes directly with the rate (ARM) — ask which one you’re signing.
The 2026 rate backdrop (it changes — context only)
⚠️A fixed mortgage’s break penalty is often calculated on the Interest Rate Differential (IRD) and can run into the tens of thousands in some cases — far above variable’s “about three months’ interest.” If a move or refinance is likely in the next few years, that potential penalty may matter more than today’s rate gap.
The overlooked factor: break penalties differ enormously
ℹ️How much you can borrow is set by the stress test, not by your contract rate. Estimate affordability at the higher of contract rate + 2% or 5.25% so you don’t overshoot your budget while house-hunting.
Unavoidable either way: the stress test
So how do you choose? Three questions
Set aside “betting on rates” and look at yourself: First, need for certainty — a tight budget that can’t stomach a changing payment and wants peace of mind leans fixed. Second, your timeline — if a move, refinance, or relocation is likely in the next few years, variable’s low penalty is a real, dollar advantage. Third, tolerance for volatility — only go variable if you can accept your payment (or principal/interest split) moving with the Bank and have a buffer for hikes. Work through these three, then factor in current rates — rather than just chasing “which number is lower today.”
💡 The real divide between fixed and variable isn’t “which rate is lower today” — it’s certainty, the break penalty, and your tolerance for swings. Fixed buys peace of mind but can punish an early break hard; variable’s payment moves but its prepayment penalty is usually far gentler. Think through whether you’re likely to touch this mortgage early in the next few years and whether you can absorb volatility — then look at rates. That choice fits you, instead of merely betting right.
Frequently Asked Questions
Which is lower in 2026 — fixed or variable?
Rates move with Bank decisions and markets, so any “which is lower now” answer has a shelf life. As of June 2026 the policy rate is held at 2.25% and prime is about 4.45%. More importantly, don’t just compare today’s numbers — certainty, the break penalty, and your timeline often affect your total cost more than a small rate gap.
Will my payment change on a variable rate?
It depends on your product. One type (VRM) keeps the payment amount fixed but shifts the principal/interest split as rates move; another (ARM) changes the payment amount directly with the rate. Ask which kind your variable is, and how a hike would affect your payment or amortization, before signing.
Why do prepayment penalties matter so much?
Because many people break a 5-year term early due to a move, refinance, or life event. Variable’s penalty is usually about three months’ interest — relatively small; fixed is often calculated on the IRD and can reach the tens of thousands. If you’re likely to touch this mortgage in the next few years, penalty-friendliness can matter more than the rate.
Does the stress test affect whether I choose fixed or variable?
The stress test mainly affects how much you can borrow, and it applies to both: per OSFI, you generally qualify at the higher of contract rate + 2% or 5.25%. It doesn’t directly tell you which type to pick, but it reminds you to assess affordability at that higher assumed rate so you don’t buy too tight and struggle if rates move.
Arthur Zhao
Real Estate Broker · FRI · ABR · SRS · PSA · MCNE · E-PRO · GUILD Elite
VP & Branch Manager, Bay Street Group Inc.
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