How each type is priced
Fixed rates and variable rates are built from different inputs, and that difference explains most of their behaviour. A fixed rate is priced from the Government of Canada benchmark bond yields of a comparable term, plus a spread the lender adds for funding costs, risk and margin. A variable rate is priced from the lender's prime rate, which moves when the Bank of Canada changes its policy interest rate.
The Bank of Canada publishes the policy interest rate, the prime rate, conventional mortgage rates and Government of Canada benchmark bond yields. You can read the current series on the Bank of Canada's rates page. Those series are useful benchmarks for understanding the direction of pricing. They are benchmarks, not offers, and no lender is obliged to lend at them.
One detail trips people up when they compare quotes: Canadian fixed-rate mortgages are compounded semi-annually by law. A quoted fixed rate compounded semi-annually is not identical to the same number compounded monthly, so two quotes are only directly comparable when the compounding method matches. Variable-rate products are usually calculated on the outstanding balance using a different method, and the specific method is set out in the mortgage or loan documents.
Fixed and variable side by side
| Feature | Fixed rate | Variable rate |
|---|---|---|
| Main pricing input | Government of Canada benchmark bond yields of a similar term, plus a lender spread | The lender's prime rate, which follows the Bank of Canada policy interest rate |
| Payment during the term | Stays the same for the term | Changes if the payment is adjustable; if the payment is fixed, the amortization period absorbs the change |
| Compounding on mortgages | Semi-annual, by law | Set by the contract; typically calculated on the outstanding balance |
| Cost of breaking the term | Usually calculated with the lender's own formula and can be substantial | Usually a simpler calculation tied to the outstanding balance |
| What you know at signing | The interest cost for the term | The pricing formula, not the future cost |
| Common uses | Fixed-rate mortgages, some personal and auto loans | Variable-rate mortgages, home equity lines of credit, unsecured lines of credit |
| Main risk | Paying more than the market if rates fall | Paying more if the policy rate and prime rise |
What the Bank of Canada series mean for each type
Four published numbers do most of the work behind Canadian loan pricing, and each one affects fixed and variable products differently.
- The policy interest rate. This is the Bank of Canada's target for the overnight rate. It is the lever that moves short-term borrowing costs, and it is the largest single input into variable-rate pricing.
- The prime rate. This is the rate lenders publish as their base for variable products. It typically moves with the policy rate, though each lender sets its own prime and can move it on its own timetable. Most variable mortgages, home equity lines of credit and unsecured lines of credit are quoted as prime plus or minus a spread.
- Conventional mortgage rates. These are published survey figures for common mortgage terms. They show where the market sits, but individual offers vary with the borrower, the property, the term and the lender.
- Government of Canada benchmark bond yields. These anchor longer-term fixed pricing. When five-year bond yields move, five-year fixed mortgage pricing usually follows, even if the policy rate has not changed.
That last point is why fixed and variable rates can move in opposite directions. If bond yields rise while the policy rate holds, fixed rates can rise while variable rates stay put. If the policy rate falls but bond yields do not, variable pricing can improve while fixed pricing does not.
What changes when the policy rate moves
When the Bank of Canada changes the policy rate, the effects land in different places depending on the product you hold.
Variable-rate mortgages. If your payment is adjustable, the payment moves with prime. If your payment is fixed within a variable-rate product, the payment stays the same and the amortization period stretches or shrinks instead. That second design is easy to miss: the payment feels stable while the balance is repaid more slowly.
Lines of credit and home equity lines of credit. Line of credit interest rates are almost always variable and tied to prime, so the interest rate on a line of credit responds to a policy rate change quickly, often within days. Rates on equity line of credit products behave the same way, and because these products are usually interest-only at the minimum payment, a rate increase shows up as a higher required payment rather than as a longer amortization. That makes them more sensitive to short-term rate moves than a fixed mortgage with the same balance.
Fixed-rate mortgages and fixed-rate loans. Nothing changes during the term. The effect of a policy rate move reaches you at renewal, or when you sign a new product, and it arrives indirectly through bond yields rather than directly through prime.
New borrowing. Anyone qualifying for new credit is assessed against the rates and rules in force at the time, which is where the next section matters.
Qualification rules shape the offer, not just the rate
Two borrowers can see the same posted rate and end up with different offers, because underwriting rules decide what a lender can approve and on what terms. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, and they qualify an uninsured mortgage at the greater of the contract rate plus 2 percentage points and 5.25%, as set out in OSFI Guideline B-20. That qualifying rate is higher than the contract rate, which means a variable-rate borrower is tested against a buffer rather than against today's price.
Secured borrowing has its own ceilings. At federally regulated lenders, a home equity line of credit is generally limited to 65% of appraised property value, with total secured lending against the property usually capped at 80%. Those limits shape how much room you have to combine a mortgage with a line of credit, and they apply regardless of which rate type you choose for the mortgage portion.
Caps and rules that sit outside the rate conversation
Rate type is one decision; the legal limits on borrowing costs are another. The Criminal Code criminal rate of interest is 35% per year under section 347, which sets the outer boundary for what any lender can charge.
Short-term payday-style credit has its own regime. Where a province operates a licensed payday lending regime, the federal Payday Lending Regulations (SOR/2024-114) cap the cost of borrowing at $14 per $100 advanced, and some provinces set a cap lower than $14, in which case the lower cap applies. Quebec does not license payday lending, which effectively prohibits the model there. A payday loan is generally up to $1,500 for a term of 62 days or less.
Lending in Canada is licensed provincially, so the regulator and the rules differ depending on where you live and who is lending. Complaints about federally regulated financial institutions go to the Financial Consumer Agency of Canada, while provinces license and supervise most other lenders. Credit reporting is handled by two national bureaus, Equifax Canada and TransUnion Canada, and serious credit events stay on a report for a set period: a consumer proposal stays on a credit report for 3 years after completion, or 6 years from filing, whichever comes first, and a first bankruptcy stays on a credit report for 6 years after discharge. Only a licensed insolvency trustee can administer a consumer proposal or bankruptcy.
How to compare the two for your situation
- Compare compounding methods first, since a fixed mortgage rate is compounded semi-annually by law while variable products use the contract's own method.
- Compare the full cost of breaking the term, not just the rate, because a fixed term can carry a larger prepayment charge if your plans change.
- Check how the payment behaves if prime moves: an adjustable payment, or a fixed payment with a moving amortization period.
- Ask what rate you would be qualified at, since the stress test uses a higher qualifying rate than the contract rate.
- Look at secured borrowing as a whole, because home equity line of credit limits and total secured lending caps interact with the mortgage you choose.
- Match the term length to how long you expect to hold the property or the debt, rather than to a rate headline.
The lowest rates are only available to the most qualified applicants.
None of this decides the answer for you. The right rate type depends on your cash flow, how long you plan to hold the debt, how much flexibility you need, and how much payment uncertainty you can absorb. For a significant decision, the right answer comes from your own numbers and, where appropriate, from regulated professional advice.
loanmoose.ca is not a lender. It does not make loans, set rates or make credit decisions; it is a matching and comparison service that connects Canadians with licensed providers, and the provider decides whether to lend and on what terms.