Something unusual happened to Canadian mortgage rates in the last few weeks. Fixed rates moved up sharply while the Bank of Canada sat completely still. That almost never happens without the central bank doing something, and it caught a lot of people off guard.

Here is what happened: the war in the Middle East drove oil prices toward $100 a barrel. Higher oil prices raise inflation expectations. When investors expect more inflation, they demand higher returns on bonds to protect the value of their money. That pushed Government of Canada 5-year bond yields up to around 3.1%, the highest since mid-2024. Lenders price 5-year fixed mortgages as a spread above those yields. So fixed rates climbed to roughly 4.04% through brokers and 4.29% at major banks, up from about 3.79% in February. A 25-basis-point jump in six weeks.

Variable rates? Completely unchanged. The Bank of Canada held its overnight rate at 2.25% on March 18 for the third consecutive meeting, keeping the prime rate at 4.45%. The best 5-year variable rates available today sit at around 3.35%, expressed as prime minus roughly 1.10%.

So as of today, fixed and variable are not close to each other. There is a 69-basis-point gap between the best variable rate and the best broker fixed rate. That is real money over five years.

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The math on a real mortgage

Take a $650,000 mortgage with a 25-year amortization. At 3.35% variable, your monthly payment is roughly $3,217. At 4.04% fixed, it is roughly $3,415. That is $198 a month more on fixed, or $2,376 a year. Over the five-year term, assuming rates do not move at all, variable saves you about $11,880 in interest before any compounding difference.

That is the baseline. It assumes the Bank of Canada does nothing for five years, which will not happen. So the real question is: what does the Bank of Canada actually do from here, and how much does that change the math?

There are three plausible scenarios. The first is that rates hold at 2.25% for most of 2026 and eventually drift down slightly as the economy softens. This is what most economists are forecasting right now. The C.D. Howe Institute's shadow rate council, which includes chief economists from all six major banks, called for the overnight rate to stay at 2.25% through most of 2026. Under this scenario, variable wins easily.

The second scenario is a hike. Scotiabank and National Bank are the only major institutions projecting rate increases, with a possible 50-basis-point hike by end of 2026 if inflation accelerates from energy costs. Nesto puts that risk in the picture but considers it unlikely without sustained oil price pressure. A 50-basis-point hike would bring prime to 4.95% and the best variable rate to around 3.85%. Still below 4.04% fixed. You would need multiple hikes totalling more than 70 basis points just to make fixed cheaper than where variable starts today.

The third scenario is a cut. Canada's economy contracted in Q4 2025, shed 84,000 jobs in February, and is facing real trade headwinds from U.S. tariffs. If the Middle East situation stabilizes and oil prices fall back, the inflation pressure evaporates and the Bank has room to move down again. Variable wins bigger.

None of this means variable is guaranteed to beat fixed. It is a probabilistic bet. But the math has to go pretty wrong for fixed to win at a 69-basis-point starting disadvantage.

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The thing most guides skip

Almost every fixed-vs-variable article focuses on rate direction and ignores the break penalty. This is a mistake, because the penalty is often the deciding factor in practice.

If you break a fixed mortgage early, your lender charges the Interest Rate Differential, or IRD. That is a formula that calculates how much interest the lender loses by letting you out of your contract, and it can easily run $15,000 to $25,000 on a typical Canadian mortgage depending on the rate environment. People break mortgages more often than they think: job relocations, divorces, refinances when equity builds, upsizing when the family grows. Life happens inside five years.

Variable mortgages carry a break penalty of three months' interest. On a $650,000 mortgage at 3.35%, that is around $5,440. The difference between a variable break penalty and a fixed IRD penalty, in an environment where fixed rates have risen since you signed, can be enormous. This is partly why a Bank of Canada study covering 1950 to 2007 found that variable borrowers came out ahead in roughly 90% of five-year periods, even accounting for rate cycles. The lower penalties mean more flexibility to act when conditions change.

There is also a difference between two types of variable product worth knowing. A variable rate mortgage with fixed payments keeps your monthly amount the same when rates move, but adjusts how much of each payment goes to interest versus principal. If rates rise sharply, you can hit a trigger rate, the point where your payment no longer covers all the interest, and the balance starts growing instead of shrinking. An adjustable rate mortgage changes your actual payment when prime moves, which is more transparent but less predictable month to month. Most lenders will not volunteer this distinction. Ask before you sign.

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What CREA said this week matters

On April 16, CREA downgraded its 2026 housing market forecast, cutting its sales growth estimate from 5.1% to 1%. The culprit: rising fixed mortgage rates reducing buyer activity during the spring market. CREA senior economist Shaun Cathcart was direct about it: "The timing of higher mortgage rates, along with the perception they may be temporary, could keep would-be buyers away at the most active time of year, April, May, and June, as they wait for rates to come back down."

That is an interesting framing. Cathcart is saying many buyers will sit out spring on the assumption that fixed rates will fall once the oil shock fades. He might be right. If the Middle East conflict de-escalates and crude slides back toward $75 a barrel, bond yields ease, and fixed rates could drop back below 3.80% within a few months.

But here is the thing: buyers who are waiting for fixed rates to fall are essentially betting on the same scenario that makes variable attractive right now. If the oil shock fades, fixed rates fall and variable rates either hold or get cut. Either way, the buyer who locked in variable at 3.35% today comes out fine. The buyer waiting on the sidelines for fixed rates to come down is paying rent in the meantime and competing with the same wave of buyers who will re-enter at the same moment.

Waiting for perfect conditions is a strategy that mostly produces regret in hindsight.

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So which one should you choose?

There is no single right answer. But based on where rates actually sit today, here is how to think through it.

Variable makes more sense if you have cash flow flexibility, meaning you could absorb a $200 to $300 payment increase without financial stress. It also makes sense if there is any realistic chance you will need to break the mortgage before five years are up, because the penalty gap with fixed is substantial. And it makes sense if you believe the oil shock is temporary and the BoC's next move is more likely a hold or cut than a hike, which is the majority view among Canadian bank economists right now.

Fixed makes more sense if payment certainty is what you actually need. Not as an abstract preference but as a real constraint: tight budget, one income, or you simply cannot absorb rate volatility without real hardship. Fixed also makes sense if you are renewing a pandemic-era mortgage and the predictability of knowing your payment for five years has genuine value to you. The peace of mind is real. Just know you are paying about $11,000 over the term for it, at today's spread.

One option worth considering: a shorter fixed term. A 2-year or 3-year fixed rate, which tends to price closer to variable, lets you capture more certainty without locking in for the full five years at a rate that may look expensive in 2027. If fixed rates do fall as oil pressure eases, you renew into a better environment sooner.

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The Bank of Canada's next rate announcement is April 29. A full Monetary Policy Report comes with it. That will tell you a lot about how policymakers are reading the inflation risk from oil versus the softness in the broader economy. Watch it before you sign anything.