One of the biggest decisions in your commercial mortgage is choosing between fixed and variable interest rates. This choice affects your payment amount, your total interest cost, and your financial flexibility.
Let me break down exactly how each works and how to choose what’s right for your situation.
What Fixed Rate Means
A fixed rate mortgage locks in your interest rate for the entire term. If you get a 5-year term at 6.25%, you’ll pay exactly 6.25% for all five years. Your payment stays the same. The lender can’t change it.
This provides certainty. You know exactly what your mortgage costs for the next five years. You can budget confidently because the payment doesn’t change.
Fixed rates are quoted based on the term length. A 5-year fixed might be 6.25%. A 7-year fixed might be 6.50%. A 10-year fixed might be 6.75%. Longer terms typically cost more because the lender is taking on more interest rate risk.
The rate is determined when you lock it in, usually when your application is approved or shortly before closing. Once locked, it doesn’t change regardless of what happens to interest rates during your term.
What Variable Rate Means
A variable rate mortgage ties your interest rate to the Bank of Canada’s overnight rate or the prime lending rate. Your rate fluctuates with these benchmarks.
Variable rates are usually quoted as “prime plus” or “prime minus” a certain spread. For example, “prime minus 0.50%.” If prime rate is 6.00%, your actual rate would be 5.50%.
When the Bank of Canada changes its overnight rate, banks adjust their prime rates within days. Your mortgage rate adjusts too. If prime increases by 0.25%, your rate increases by 0.25%. If prime drops, your rate drops.
This means your payment can change during your mortgage term. Some variable rate mortgages adjust the payment with every rate change. Others keep payments fixed but adjust how much goes to principal versus interest.
The advantage is you’re not locked in. If rates drop, you benefit immediately. The disadvantage is uncertainty—you don’t know what your rate will be next year.
How Rate Types Affect Your Payment
Let’s use real numbers to see the payment impact.
Assume you borrow $500,000 with a 25-year amortization.
Fixed rate at 6.25%: Your monthly payment is $3,265. It stays there for the entire 5-year term. In five years, you’ll have paid about $195,900 in total payments.
Variable rate starting at 5.75%: Your initial monthly payment is $3,145. But if rates rise to 6.25% over the term, your payment increases to match the fixed example. If rates drop to 5.25%, your payment falls to $3,030.
Over a 5-year term, the total difference can be significant depending on how rates move.
Current Rate Environment in 2026
Interest rate environments change constantly. In early 2026, we’re in a period of moderately high rates following several years of increases.
Fixed rates for commercial mortgages currently range from about 6.00% to 7.00% depending on lender, property type, and borrower strength.
Variable rates are typically 0.25% to 0.75% below comparable fixed rates. The spread varies based on lender appetite and market conditions.
The rate you actually get depends on your creditworthiness, down payment, property quality, and overall deal strength. Strong borrowers get better rates.
When Fixed Rates Make Sense
Fixed rates are the right choice in several situations.
You want payment certainty. If knowing your exact payment for the next 5 to 10 years helps you sleep at night and plan confidently, fixed rates deliver that certainty.
You expect rates to rise. If you believe interest rates will increase over your term, locking in today’s rate protects you from those increases.
Your cash flow is tight. If your property barely covers its mortgage payment, you can’t afford payment increases. Fixed rates prevent unwelcome surprises.
You’re risk-averse. Some investors prefer the security of known costs over the potential savings of variable rates. If that’s you, go fixed.
Long-term holds. If you’re buying to own for 10+ years and plan to ride out market cycles, fixed rates align with that stable, long-term approach.
Most commercial borrowers choose fixed rates. The certainty outweighs the potential savings from variable rates for most investors.
When Variable Rates Make Sense
Variable rates work well in specific situations.
You expect rates to decline. If you believe rates will drop over the next few years, variable rates let you benefit from those decreases immediately.
You can handle payment fluctuation. If your property has strong cash flow with plenty of cushion, you can absorb modest payment increases without stress.
Short-term ownership. If you’re buying to renovate and sell within 2 to 3 years, variable rates offer lower initial costs and more flexibility.
You’re financially strong. Wealthy investors with deep pockets can take advantage of variable rate savings without worrying about payment increases.
You want lower initial rates. Variable rates typically start 0.25% to 0.75% lower than fixed rates. For some borrowers, that initial savings is worth the uncertainty.
The Historical Perspective
Historically, borrowers who chose variable rates often came out ahead over full mortgage cycles. Rates rise and fall. Over a complete cycle, variable rate borrowers typically paid less total interest.
But this isn’t guaranteed. Sometimes rates rise and stay elevated for years. Variable rate borrowers in those periods paid more than fixed rate borrowers.
The challenge is you can’t predict the future. You’re making a bet on where rates will go, and nobody knows for certain.
Prepayment Penalties Differ
This is a crucial difference many borrowers miss. Prepayment penalties are usually much higher on fixed rates than variable rates.
With fixed rates, if you sell the property or refinance before your term ends, you’ll pay the greater of three months interest or an Interest Rate Differential (IRD). IRDs can be enormous—tens of thousands of dollars.
With variable rates, prepayment penalties are typically just three months interest. Much more manageable.
If there’s any chance you’ll sell or refinance before your term ends, this difference matters enormously.
Example: You have a $500,000 mortgage at 6.25% fixed with 3 years remaining. Rates have dropped to 5.00%. Your IRD penalty could be $40,000 or more.
Same mortgage but variable rate? Your penalty is about $7,800 (three months interest).
Convertibility Features
Many variable rate mortgages offer conversion options. You can convert to a fixed rate at any time during your term.
This provides a safety valve. Start with variable rates to save money. If rates start climbing and you get nervous, convert to fixed. You’ve saved money during the variable period and then locked in certainty.
Not all lenders offer this. Ask specifically about conversion options and any fees involved.
Rate Holds and Timing
When you apply for a mortgage, lenders offer rate holds—guarantees that your approved rate won’t increase even if market rates rise before you close.
Fixed rates typically have 60 to 120 day rate holds. This protects you during the application, approval, and closing process.
Variable rates don’t need holds because they’re tied to prime rate, which is what it is on your closing date.
If you’re concerned about rates rising before you close, fixed rates with long holds provide protection.
Blended Options
Some lenders offer hybrid or blended mortgages—part fixed, part variable. You might put 60% of your mortgage on fixed rate and 40% on variable.
This splits the difference, giving you some certainty and some flexibility. It’s a compromise for borrowers who can’t decide between the two extremes.
Blended mortgages are less common in commercial lending than residential, but some lenders offer them. Ask if it interests you.
How Property Type Affects Rate Choice
Different property types might suggest different rate choices.
Stable, fully-leased properties with strong cash flow can better handle variable rate uncertainty. You have cushion to absorb payment increases.
Properties with tight cash flow or high vacancy risk might need fixed rate certainty. You can’t afford unexpected payment increases.
Value-add properties you plan to improve and sell within a few years might benefit from variable rates’ lower initial cost and lower prepayment penalties.
Trophy properties with very long-term holds might warrant fixed rates for stable, predictable ownership costs.
Rate Negotiation
Regardless of fixed or variable, rates are somewhat negotiable, especially for strong borrowers on quality properties.
Your credit score, down payment size, net worth, experience, and the property quality all affect what rate you get offered. Stronger borrowers get better rates.
Shop your deal to multiple lenders or work with a broker who can do this for you. Lenders compete on rate, and getting multiple quotes gives you leverage.
Even a 0.25% rate improvement saves thousands over a 5-year term on a large mortgage.
Your Personal Financial Situation Matters
Your overall financial picture should influence your rate choice.
High net worth, strong income: You can handle variable rate uncertainty. Consider variable to save money.
Tight budget, limited reserves: You need fixed rate certainty. Unexpected payment increases could create real problems.
Multiple properties: If this is one of several properties, variable on some and fixed on others creates a balanced portfolio approach.
Concentrated investment: If this property represents most of your investment capital, fixed rates reduce risk.
Running the Scenarios
Before deciding, run some scenarios. Use mortgage calculators to see payment differences.
What if rates stay flat? How much do you save with variable rates?
What if rates increase by 1%? How much do your payments increase? Can you handle that?
What if rates drop by 1%? How much do you save with variable? Is that worth the risk that rates could rise instead?
Concrete numbers help you make informed decisions rather than guessing.
The Refinancing Perspective
Think about what happens at renewal or refinancing. With fixed rates, you’re refinancing at whatever rates prevail in 5 to 10 years. Unknown.
With variable rates, you’re already experiencing current rates. If rates have risen, you’re already paying higher amounts, so renewal isn’t a shock. If rates have fallen, you’ve been benefiting all along.
Neither approach avoids refinancing risk entirely, but they handle it differently.
Lender Availability
Not all lenders offer both fixed and variable rate commercial mortgages. Some only do fixed. Some specialize in variable.
This can limit your options. If you strongly prefer variable rates, you’ll need to work with lenders who offer them.
Brokers can help you navigate which lenders offer which rate types and find the best options for your preferred approach.
Making Your Decision
Here’s a framework for deciding.
List your priorities: Certainty? Savings? Flexibility?
Assess your financial strength: Can you handle payment increases?
Consider your property: Is cash flow tight or strong?
Think about your timeline: Holding long-term or selling soon?
Evaluate the market: Where do you think rates are headed?
Your answers to these questions point you toward fixed or variable.
The Hybrid Strategy
Many successful investors use both rate types strategically across their portfolio. Their primary residence might be fixed for certainty. Their first commercial property might be fixed. But their third and fourth properties might be variable because they have enough stability elsewhere to take some risk for potential savings.
This balanced approach lets you benefit from variable rate savings when rates cooperate while having stability elsewhere.
Your Next Steps
Think about your situation and preferences. Talk to your accountant and financial advisor about what makes sense given your overall financial picture.
Get actual rate quotes for both fixed and variable from lenders. See what the real difference is for your specific deal.
Run the numbers at different rate scenarios. Know what payment increases you could face with variable rates, and decide if you’re comfortable with that.
At Creek Road Financial Inc., we can show you fixed and variable rate options from multiple lenders. We can walk through scenarios showing how each choice affects your payments and total costs. We can help you think through which approach makes sense for your specific property, financial situation, and goals.
There’s no universally right answer—it depends on your circumstances. But with clear information and thoughtful analysis, you can make the choice that’s right for you.