Published: October 14th, 2026 • Last Updated: October 14th, 2026
Author: Ross Taylor on AskRoss.ca

Why a Deeply Discounted Variable Rate Might Beat a Three-Year Fixed Right Now

In June 2022, Canada’s average core inflation rate was 5.45%. Today it’s down to 1.95%, slightly below the Bank of Canada’s 2% target.

You would think that means lower mortgage rates. It hasn’t.

The yield on five-year Government of Canada bonds is actually 0.44 percentage points higher today than it was in June 2022, when inflation was running wild.

Inflation came down. Your fixed rate didn’t get the memo.

As I wrote last month, rising American bond yields drag Canadian fixed rates up with them. On a $500,000 mortgage, a half-point jump in your fixed rate costs you roughly $137 more every month.

Jump to a specific section in this article ↓↓

• Why are fixed mortgage rates rising when inflation is falling?
• Is a three-year fixed mortgage a good choice right now?
• Why do I prefer a deeply discounted variable-rate mortgage?
• What do I like most about a variable-rate mortgage?
• Advice from Ross Taylor Mortgages: Choosing Between Fixed and Variable Right Now
• List of all FAQs: Fixed and variable mortgage rates in Canada

Why are fixed mortgage rates rising when inflation is falling?

Fixed mortgage rates follow government bond yields, and bond yields price in where investors think inflation is heading, not where it is today. Right now, rising oil prices, higher business costs and a shaky American bond market all point in the same uncomfortable direction.

Why is the bond market worried about inflation coming back?

• In 2022, investors were betting on relief. Inflation was soaring, but the market expected it to come under control and interest rates to come back down.
• Today, the worry runs the other way. Inflation has cooled considerably, but investors are concerned it could start climbing again, and that fear gets priced straight into fixed mortgage rates.
• Oil is climbing again. Renewed conflict in the Middle East is pushing oil prices higher, and businesses are reporting higher costs for materials and services.
• Canadians are noticing too. More and more people are concerned about inflation making a comeback.
• The United States is dragging our yields up with it. It’s dealing with enormous government debt, inflation concerns and economic uncertainty, and American bond yields have been rising. Canadian bond yields tend to get pulled along for the ride.

Inflation may be under control today, but the bond market isn’t convinced it will stay that way.

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Is a three-year fixed mortgage a good choice right now?

Rob McLister, a respected Canadian mortgage analyst, recently made a strong case for the three-year fixed. His reasoning is that financial markets are anticipating further rate increases, not cuts.

Why would a three-year term make sense if rates are rising?

• Rates move in cycles. If the Bank of Canada raises rates over the next couple of years but starts cutting again by 2029, a three-year fixed could work out very nicely.
• You’re protected in the meantime. Your rate stays put while rates climb, and when you renew three years from now, you might find yourself in a much more favourable rate environment.
• You’re not locked in for five years. A five-year fixed can be expensive to break, so a shorter term gives you an earlier way out.

Rob makes a convincing case, and I can certainly see the appeal. But if I had access to a deeply discounted variable rate, I might go in a different direction.

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Why do I prefer a deeply discounted variable-rate mortgage?

I’m a fan of variable-rate mortgages, particularly when we can negotiate a substantial discount from the lender’s Prime rate. A recent client had to choose between a three-year fixed and a discounted variable, and the numbers have moved a lot since he did.

How much cheaper is a discounted variable rate today?

My client chose the variable at a 0.60% advantage

• He had two attractive options. A three-year fixed at 3.94%, or a five-year variable at Prime minus 1.11%, which worked out to 3.34%.
• He chose the variable. On a $500,000 mortgage with a 25-year amortization, that’s about $160 a month less than the fixed payment.

The gap has since widened to 1.10%

• The variable rate hasn’t moved. Variable rates follow Prime, not bond yields, so I can still offer the same 3.34% today.
• My best comparable three-year fixed is now 4.44%. That’s up half a point, even though the Bank of Canada’s policy rate hasn’t changed.
• On a $500,000 mortgage, the difference is now roughly $296 a month. The variable payment is about $2,454 and the three-year fixed payment is about $2,751, both on a 25-year amortization. Fixed pricing can move that fast without the Bank of Canada lifting a finger.

The 3.34% variable isn’t available to everyone

• It’s for qualifying insured purchases or transfers only. Borrowers with insurable or uninsurable mortgages, including many refinancing clients, will generally face considerably higher rates.
• Both rates were real offers to an eligible borrower. Rates change frequently, so treat them as an example rather than a quote.

Not sure which category you fall into? Book a call, and we’ll confirm where your mortgage falls before you compare a single rate.

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What do I like most about a variable-rate mortgage?

Two things stand out: the discount is locked in for your whole term, and getting out early usually costs less than breaking a fixed. The catch is that your rate floats with Prime, so you need room in your budget if the Bank of Canada raises rates.

What makes a discounted variable worth the risk?

Your discount stays fixed even when your rate doesn’t

• Prime minus 1.11% stays Prime minus 1.11% for all five years. With Prime at 4.45%, that works out to 3.34% today.
• Your rate moves with Prime. If Prime rises 0.50%, so does your rate. If Prime falls 0.50%, yours falls with it.
• When Prime comes down, you benefit automatically. No renewal and no renegotiating.

Breaking a variable usually costs less than breaking a fixed

• Most variable penalties are three months’ interest. On a $500,000 mortgage at 3.34%, that’s about $4,175. Breaking a fixed-rate mortgage can trigger an interest rate differential penalty instead, and that can cost thousands of dollars more, especially if rates have fallen since you signed.
• That flexibility matters more than people expect. If you sell, refinance or make other changes before your term ends, it could save you thousands.

Variable rates aren’t for everybody

• You have to be comfortable with higher payments. If the Bank of Canada raises rates, your borrowing costs go up too. On a $500,000 mortgage, every 0.25% increase adds roughly $66 a month.
• Know which kind of variable you have. Some adjust your payment whenever Prime changes. Others keep the payment fixed and shift the split between interest and principal, which is when you need to understand what happens at your trigger rate.

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Advice from Ross Taylor Mortgages: Choosing Between Fixed and Variable Right Now

A deeply discounted variable is my pick over a three-year fixed right now, especially when it starts more than a full point below the comparable fixed rate.

That doesn’t mean the variable will win over the full term. Nobody knows yet, and I’m skeptical of anyone who claims they do.

Which mortgage fits your situation?

• Choose a five-year fixed if certainty matters most. Your payment won’t change for five years, whatever the bond market does.
• Choose a three-year fixed if you want protection now and a second look sooner. It’s a reasonable call for anyone worried about rising rates who doesn’t want to commit for five years.
• Choose a discounted variable if your budget can absorb a few rate hikes. Today’s variable starts 1.10% below the comparable three-year fixed. It would take more than four quarter-point hikes, delivered quickly, before it cost you more.
• Ask which pricing tier you’re in before you compare quotes. A rate built for an insured purchase means nothing if you’re refinancing.

The best mortgage isn’t necessarily the one with the lowest advertised rate. It’s the one with the right mix of cost, flexibility and peace of mind for your situation.

If you’re buying or renewing this year, reach out, and we’ll compare the fixed and variable options you actually qualify for.

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List of all FAQs: Fixed and variable mortgage rates in Canada

Why are fixed mortgage rates rising when inflation is falling?

• Fixed rates follow government bond yields, which reflect where investors expect inflation and interest rates to go, not where they are today.
• Concerns about oil prices, business costs and rising American bond yields have pushed five-year Government of Canada yields 0.44 percentage points above June 2022 levels.

Is a three-year fixed mortgage a good choice right now?

• It can be, if rates rise and then fall. A three-year fixed protects you from increases now and lets you renew in 2029, when rates may be lower.
• You also avoid committing to five years, which matters because a five-year fixed can be expensive to break.

Why do I prefer a deeply discounted variable-rate mortgage?

• It can start well below fixed pricing. A recent qualifying offer was 3.34% variable against 4.44% for a comparable three-year fixed.
• The gap widened from 0.60% to 1.10% in a short time, even though the variable rate never moved.

What do I like most about a variable-rate mortgage?

• Your Prime discount is locked in for the full term, so you benefit automatically if Prime comes down.
• The penalty to break it is usually three months’ interest, which is often less than the interest rate differential penalty on a fixed-rate mortgage.

What does Prime minus 1.11% mean on a variable-rate mortgage?

• Your rate is always 1.11 percentage points below your lender’s Prime rate for the full term. With Prime at 4.45%, that’s 3.34%.
• If Prime moves, your rate moves by the same amount, but the 1.11% discount stays fixed.

Is a three-year fixed mortgage better than a five-year variable mortgage?

• Not necessarily. A three-year fixed protects you against rising rates, while a five-year variable may start lower and benefits automatically from future rate cuts.
• The size of the variable discount and your comfort with payment changes should decide it.

Why do insured mortgages sometimes qualify for lower interest rates?

• Mortgage default insurance protects the lender against losses if the borrower defaults, which lowers the lender’s risk and often its pricing.
• That’s why the lowest advertised rates are usually limited to insured purchases and transfers.

What is the difference between insured, insurable and uninsurable mortgages?

• Insured mortgages carry default insurance, usually because the down payment is less than 20%.
• Insurable mortgages meet the insurance rules but have 20% or more down, while uninsurable mortgages, including refinances, fall outside those rules and usually cost more.

How much does it cost to break a variable-rate mortgage?

• Most variable-rate mortgages charge three months’ interest. On a $500,000 balance at 3.34%, that’s about $4,175.
• Check your own mortgage contract, since penalty terms vary by lender.

What is a trigger rate on a variable-rate mortgage?

• It’s the rate at which your fixed payment no longer covers the interest owing. It only applies to variable mortgages where the payment stays the same when Prime changes.
• If you hit it, your lender may ask you to raise your payment, make a lump-sum payment or change your mortgage terms.

Do bond yields affect variable mortgage rates?

• Not directly. Variable rates follow your lender’s Prime rate, which moves with the Bank of Canada’s policy rate.
• That’s why fixed rates can rise while variable rates stay exactly where they are.

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