Fixed vs Variable in Canada (2025): Break-Even Calculator + Scenario Guide

This choice has always been important, but in 2025 it’s more complex than ever. The Bank of Canada (BoC) has begun cautiously lowering its policy rate after years of elevated levels, and mortgage borrowers are weighing the stability of fixed rates against the potential savings of variable rates.

This guide will give you the full picture:

• How fixed and variable mortgages work in Canada
• Pros and cons in the 2025 market
• A break-even analysis for choosing one over the other
• Real-world scenarios of Canadian borrowers
• A step-by-step framework to decide which mortgage best fits your goals

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1. How Fixed and Variable Mortgages Work in Canada

Fixed-Rate Mortgages

• Your rate and payments remain the same for your full term (usually 5 years).
• Pricing is tied to Government of Canada bond yields, especially the 5-year bond.
• They provide certainty, making budgeting easier.
• Prepayment penalties can be steep if you break early.

Variable-Rate Mortgages

• Your rate floats with your lender’s prime rate, which moves when the BoC changes its overnight rate.
• Depending on your mortgage contract, either your payment or your interest/principal split changes.
• These loans tend to be more flexible and often have lower penalties if broken early.
• They can save money if rates fall, but cost more if rates rise.

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2. The Market Context in 2025

• Bank of Canada overnight rate: 2.50% (after cuts in January, March, and September).
• Prime lending rate: ~5.70%.
• Average 5-year fixed mortgage: 4.5%–5%.
• Variable mortgage offers: Often prime –0.5% (~5.20%).

This means fixed and variable rates are closer together than in 2023–24, making the break-even point an essential calculation.

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3. Fixed vs Variable: Pros and Cons in Today’s Market

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4. The Break-Even Point Explained

Imagine you’re comparing:

• 5-year fixed: 4.75%
• 5-year variable: Prime –0.5% = 5.20%

Today, fixed looks cheaper. But here’s the math:

• If the BoC cuts 25 bps once, your variable drops to ~4.95% (almost even).
• If the BoC cuts 50 bps or more, variable pulls ahead.

Rule of Thumb for 2025

Variable will beat fixed if the BoC cuts two more times (≈0.50%) during your mortgage term.

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5. Real-Life Borrower Scenarios

Scenario A: Emily (First-Time Buyer)

• Mortgage: $400,000
• Term: 5 years
• Concern: Budgeting every dollar

Emily locks into a fixed rate at 4.75%. Even if variable dips lower later, she values the peace of mind of knowing her exact monthly payment for 5 years.

Scenario B: Ahmed & Leila (Young Family)

• Mortgage: $650,000
• Horizon: Planning to upgrade in 3 years
• Concern: Early payout penalties

They choose variable. If they break the mortgage early, their penalty is far smaller. Plus, if the BoC keeps cutting, they’ll benefit.

Scenario C: Raj (Investor)

• Mortgage: $500,000 on a rental property
• Cash flow: Strong enough to absorb swings

Raj opts for variable. He’s betting on further cuts to 2.00% by mid-2026, which could lower his payments significantly.

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6. Hybrid and Alternative Strategies

• Split mortgage (50/50 fixed + variable): Half your loan is stable, half benefits from cuts.
• Shorter-term fixed (2–3 years): A bridge until the rate cycle stabilizes.
• Adjustable vs. static-payment variable: Clarify how your lender applies changes—either by altering your payment or changing how much goes toward principal vs. interest.

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7. What to Watch in 2025

1. October & December BoC Meetings: Two key events that may shape rates heading into 2026.
2. Inflation Reports: If CPI dips below 2%, expect more cuts.
3. Bond Yields: Falling yields bring down fixed rates.
4. Housing Market Activity: Strong sales could make the BoC pause cuts.

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8. Step-by-Step Framework to Decide

1. Ask yourself: Can I handle my payment rising $100–200/month if rates move against me?
2. Timeline: Do you expect to stay in this home for the full term, or might you break early?
3. Risk tolerance: Does payment certainty help you sleep better, or are you comfortable riding the market?
4. Talk to a broker: Compare real lender offers—not just posted rates.

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Conclusion: Fixed vs Variable in 2025

There’s no universal winner between fixed and variable mortgages. Instead:

• Choose fixed if you value stability and budget certainty.
• Choose variable if you can handle some volatility and want flexibility or expect more BoC cuts.
• Choose hybrid if you want the best of both worlds.

The decision ultimately depends on your financial situation, goals, and risk comfort, not just the rate sheet.