Variable-Rate Mortgage
Hypothèque à taux variable in French
Quick definition
A variable-rate mortgage charges interest at the lender's prime rate plus or minus a contractual spread, so your rate moves whenever prime moves. Prime follows the Bank of Canada's overnight rate. Depending on the structure, either your payment floats or the mix inside a fixed payment shifts.
How the rate is set
A variable rate is quoted as a spread against the lender's prime rate, usually a discount, for example prime minus 0.90%. The spread is locked in your contract for the whole mortgage term; what moves is prime itself. Lenders adjust prime in near-lockstep with the Bank of Canada's overnight rate, so every Bank rate announcement is, in effect, a mortgage announcement for variable borrowers.
That is the key contrast with a fixed-rate mortgage, which is priced off bond yields and then frozen for the term. A variable rate is never frozen; it re-prices within days of a central bank move, in both directions.
The two structures: floating payment vs. fixed payment
This is the distinction most borrowers miss, and it matters more than the rate itself. Canadian lenders sell variable-rate mortgages in two very different builds.
With an adjustable-rate mortgage (often labelled ARM, offered by many monoline lenders and some banks), your payment is recalculated whenever prime moves. Rates up, payment up; rates down, payment down. The upside is honesty: your amortization stays exactly on schedule because every payment covers the interest actually owing plus the planned principal.
With a fixed-payment variable (the common structure at most big banks), your payment stays the same when prime moves. What changes is the split inside it: as rates rise, more of each payment goes to interest and less to principal, quietly stretching your effective amortization. Your cash flow is stable, but your payoff date is not.
The trigger rate and negative amortization
A fixed-payment variable has a breaking point. If rates climb far enough, you reach the trigger rate: the level at which your unchanged payment no longer covers even the interest. Past it, unpaid interest gets added to your balance and the mortgage grows instead of shrinking, called negative amortization. Lenders then step in, typically requiring a payment increase, a lump sum, or a conversion to a fixed rate; some let the balance grow until it hits a ceiling relative to the home's value.
This stopped being theoretical in 2022 and 2023, when the Bank of Canada raised its policy rate from 0.25% to 5.00% in under 18 months. Hundreds of thousands of fixed-payment variable borrowers hit their trigger rates, some saw their effective amortizations balloon past 40 years on paper, and banks phoned customers to raise payments. The episode is now the standard cautionary tale: a fixed payment on a variable rate defers pain, it does not cancel it.
Breaking or converting a variable
Variables are the cheaper mortgage to exit. Breaking a closed variable typically costs a prepayment penalty of just three months' interest, with no interest rate differential, which on most balances is a few thousand dollars rather than the five-figure IRD penalties fixed rates can generate.
Most variable mortgages also carry a conversion privilege: you can switch to a fixed rate with the same lender at any time, usually without penalty, for a term at least as long as your remaining one. It sounds like a free escape hatch, but you convert at the fixed rates of that day, and by the time rising rates make you want out, fixed rates have usually already risen too. Converting locks in the new reality; it does not restore the old one.
Does variable actually win?
Canadian research has long found that variable rates have beaten fixed rates in most historical periods, because borrowers pocket the starting discount and rates fall as often as they rise. But "most periods" is not "all periods": anyone who took a variable in early 2022 lived through the exception, and the gap between fixed and variable pricing shifts with the rate cycle, sometimes leaving little discount to pocket.
Qualification does not tilt the field either way. Under Canada's stress test, a variable applicant is tested at the greater of the contract rate plus 2 percentage points or 5.25% (as of July 2026), the same formula as fixed. The real question is whether your budget, and your temperament, can absorb the ride.
In Canada
Canada's variable mortgage is built on the prime-minus-spread convention, with prime moving in step with the Bank of Canada. In the United States, adjustable-rate mortgages typically stay fixed for 5 or 7 years and then reset annually off an index, capped by schedule. The Canadian version responds within days of every central bank decision, which makes Bank of Canada announcement dates appointment viewing for a large share of Canadian households in a way US Fed meetings are not for American borrowers.
The fixed-payment variable structure, standard at several big Canadian banks, is also a domestic peculiarity, and it is why "trigger rate" entered the national vocabulary in 2022.
Worked example
Sam takes a $400,000 variable mortgage, amortized over 25 years, at prime minus 0.90%, for an initial rate of 3.95% (as an illustration). The starting payment is about $2,093 a month. Then the Bank of Canada hikes and prime rises 2 full points, pushing Sam's rate to 5.95%.
If Sam has an adjustable-rate version, the payment resets to about $2,547, a $454 monthly jump that stings but keeps the 25-year payoff on track. If Sam has a fixed-payment variable, the payment stays at $2,093 while the interest share inside it swells; the effective amortization quietly stretches. Sam's trigger rate sits near 6.4%, so if prime climbs another half point, the $2,093 no longer covers interest at all and the lender will call about raising it. Same product name, very different experiences.
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated July 2026