According to mortgage expert Robert McLister, most borrowers who choose a variable-rate mortgage (VRM) do so because the payment is smaller, but this focus on the payment ignores the rate risk attached to it. He argues that a better strategy is to consider the total cost and risk profile, not just the monthly payment.
Current rate comparison
As of July 2026, the lowest nationally advertised uninsured five-year variable rate is 3.74 per cent (prime minus 0.71 per cent), compared to 4.29 per cent for the cheapest comparable five-year fixed rate. On a $500,000 mortgage with a 25-year amortization, the variable payment is about $2,560 per month versus $2,709 for the fixed, a monthly saving of $149.
The lower variable contract rate also makes it easier to pass the federal mortgage stress test. According to McLister, today's variable borrower can qualify for a mortgage roughly five per cent larger on the same income, no raise required.
Why the payment-focused mindset is risky
McLister explains that the current environment makes variable payments feel relatively safe for three reasons: the Bank of Canada policy rate is at 2.25 per cent, average core inflation is near the two per cent target, and most economists expect prime to remain steady through 2026. However, for millions of Canadians, variable-rate mortgages are not safe.
First, many borrowers spend the payment savings rather than banking them. If the $149 saving is consumed, the borrower has taken on rate risk without receiving any durable benefit. “That’s not a rate strategy; it’s a lifestyle subsidy,” McLister writes.
Second, the risk is asymmetric. The bond market has priced in about four 25-basis-point Bank of Canada rate hikes over the next five years, according to CanDeal DNA. The borrower who needed the $149 discount to make their budget work is precisely the borrower who cannot easily absorb four or more rate hikes, even if they passed the stress test.
Third, on fixed-payment VRMs, a rising prime rate shrinks the principal portion of each payment. If rates rise enough, borrowers can hit their trigger rate, at which point the lender may increase the payment to ensure interest is fully covered. The average rate hike cycle in the inflation targeting era (post 1991) has been 2.82 percentage points, enough to hit the trigger rate.
Finally, there is the potential for payment shock at renewal. Even if rates surge but payments remain static during the entire five-year term, the borrower renews with a balance that has shrunk far less than originally scheduled.
