Fixed-Rate Mortgage
Hypothèque à taux fixe in French
Quick definition
A fixed-rate mortgage locks your interest rate, and therefore your payment, for the entire mortgage term, typically 1 to 10 years in Canada with 5 years the most common. At renewal, you re-price at the market rates of the day.
How a fixed rate works
With a fixed-rate mortgage, the rate you sign at is guaranteed for the whole mortgage term. Terms run from 1 to 10 years in Canada, and the 5-year fixed is by far the most popular choice. Whatever happens to market rates during those years, your rate and your payment do not move.
The lock covers the term, not the life of the loan. Your amortization might be 25 years, but when the term ends you renew at whatever rates the market offers. A fixed rate buys certainty in chapters, not for the whole book.
Where fixed rates come from (hint: not the Bank of Canada)
A common misconception is that fixed mortgage rates follow the Bank of Canada's overnight rate. They do not, at least not directly. Fixed rates are priced off Government of Canada bond yields for the matching term: the 5-year fixed tracks the 5-year bond yield, plus a spread for the lender's costs, risk and margin.
Bond yields move on expectations, so fixed mortgage rates often shift before the Bank of Canada does anything. If markets expect cuts, bond yields and fixed rates can fall while the overnight rate has not budged; if inflation surprises, fixed rates can jump between Bank announcements. The overnight rate matters for variable rates; the bond market sets the fixed side.
The trade-offs against variable
Certainty has a price. Fixed rates typically start higher than variable-rate mortgage rates on the same term, because the lender is taking on the rate risk you are shedding. When rates fall during your term, you keep paying your locked rate while variable borrowers ride prime down.
The other cost shows up if you break the mortgage early. Breaking a closed fixed rate triggers a prepayment penalty equal to the greater of three months' interest or the interest rate differential (IRD), and the IRD on a fixed rate can run to many thousands of dollars, especially at big banks that compute it from posted rates. Variable penalties are usually just three months' interest. If there is a real chance you will sell or refinance mid-term, that asymmetry belongs in the decision.
A Canadian quirk: semi-annual compounding
By law, Canadian fixed-rate mortgages compound interest semi-annually, not monthly. A quoted 5% nominal rate works out to an effective annual rate of about 5.06%, slightly higher than the sticker. It is a small gap, but it is one reason a Canadian 5% and an American 5% (compounded monthly) are not quite the same rate, and why calculator results can differ across borders.
When a fixed rate makes sense
A fixed rate suits borrowers who value a payment that cannot move: tight budgets with little slack, first-time buyers still learning their true cost of ownership, and anyone who would lose sleep over rate announcements. It is also the natural pick when rates are low by historical standards or widely expected to rise, since you are locking in before the climb.
If your budget has room to absorb payment swings and you want to bet on rates drifting down, the variable side deserves a look. There is no universally right answer, only a right answer for your cash flow and your nerves.
In Canada
The American 30-year fixed mortgage locks one rate for three decades; the Canadian fixed rate locks it for a term, usually 5 years, inside a 25-year amortization. That renewal structure means Canadian "fixed" borrowers still face rate risk, just in instalments. It also explains why Canadians shop rates every few years while Americans may hold one mortgage rate for a generation.
Add the semi-annual compounding rule and the prevalence of IRD penalties, and the Canadian fixed-rate mortgage is a distinct product from its US namesake, despite the shared label.
Worked example
Jordan and Amara buy their first condo with a $350,000 mortgage amortized over 25 years and take a 5-year fixed at 4.5% (as an illustration, as of July 2026). Their payment is about $1,937 a month, and it stays exactly there for 60 months, no matter what the Bank of Canada or the bond market does. Midway through the term, rates jump a full point; their payment does not move, and the couple barely notices. The bill for that comfort arrives at renewal: with 20 years of amortization left, they re-price at the going 5-year rate, which could be higher or lower than 4.5%. The fixed rate did not remove rate risk; it postponed it to a date they could plan for.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated July 2026