Fixed at 4.09% or variable at 3.35%? What the gap is actually buying

Updated September 3: the Bank of Canada held its policy rate at 2.25% on September 2, as expected. The next decision is October 28.

The Bank of Canada held at 2.25% on Wednesday, September 2, and almost nobody was surprised. The policy rate has sat there since October 2025, and with inflation back up at 3.0% in July, there isn't much room to cut.

For anyone renewing or buying this fall, the more useful question isn't what the Bank just did. It's which product you sign — and right now the two options are unusually far apart.

The spread

As of late August, the lowest advertised rates were roughly:

• Five-year fixed: 4.09%
• Five-year variable: 3.35%
• Three-year fixed: 3.94%
• Two-year fixed: 3.89%

Variable is 74 basis points below five-year fixed. That's a wide gap by historical standards, and it's wide for a reason: the market thinks the next move in rates is more likely down than up, and lenders price that in.

What 74 points is worth

On a $500,000 balance over 25 years:

• Fixed at 4.09%: about $2,655 a month
• Variable at 3.35%: about $2,457 a month

That's roughly $198 a month, or $2,370 a year, and about $3,800 less interest in year one alone. Run your own balance through the house poor calculator to see what each payment does to your budget, not just your amortization schedule.

The gap isn't free money. It's the price of the risk you're taking on. Fixed means the lender carries the rate risk for five years; variable means you do.

How much would have to go wrong

The useful test isn't "will rates rise?" It's how far they'd have to rise before variable loses.

Three quarter-point hikes — a full 0.75% — puts a variable holder at roughly 4.10%, right about where five-year fixed sits today. But that's only the crossing point on the rate. Every month before it happens, the variable holder banks the difference, so the cumulative cost doesn't turn against them until well after that. With the Bank on hold and only two more decisions left in 2026 (October 28 and December 9), three hikes inside a year would take a real inflation shock.

The risk that actually bites is different: payment shock timing. If you're on a variable with a fixed payment, hikes don't change what leaves your account — they change how much of it goes to principal, and can push you toward your trigger rate. If you're on a variable with a variable payment, every hike shows up in next month's budget immediately.

Who should take which

• Tight budget, no cushion. Take the fixed. Paying $198 a month for five years of certainty is a reasonable price when a surprise payment increase would actually hurt.
• Room to absorb a few hundred a month. Variable is the better expected-value bet at this spread, and most variables can be converted to a fixed term mid-way without penalty.
• Selling, moving, or refinancing within a few years. Look hard at variable or a short fixed term. Breaking a fixed mortgage early triggers an interest rate differential penalty that can run into five figures; breaking a variable is usually capped at three months' interest.
• Renewing in the next four months. Get a rate hold now. Most lenders will hold a rate for up to 120 days, which costs nothing and only helps you.

And if you're deciding whether to buy at all rather than which rate to sign, the rent vs buy calculator is the earlier question — the product choice only matters after that one's settled.

The takeaway

At a 74-basis-point spread, variable is the cheaper bet and fixed is the cheaper insurance. Neither is wrong. What's wrong is choosing on the back of a single rate announcement — the decision you're making runs for years, and it should turn on how much of a payment increase your household could absorb without changing anything else.

Rate figures as of late August 2026 via Ratehub, reported by MoneySense. Policy rate and announcement dates: Bank of Canada, September 2, 2026 announcement. Inflation: Statistics Canada, Consumer Price Index, July 2026. Payment math via Metrestick.