Fixed vs variable rate

A fixed rate stays the same for your entire term, usually five years in Canada. Your payment doesn't move, no matter what the Bank of Canada does. A variable rate is tied to your lender's prime rate, so it rises and falls over the term. Most variable mortgages keep your payment steady and instead shift how much of each payment goes to interest versus principal, though some adjust the payment itself. The trade most people focus on is the obvious one: pay a bit more for the certainty of fixed, or take your chances with variable and hope rates drift down.

The part that gets far less attention is the penalty for breaking your mortgage early, and it's a big deal because most Canadians don't make it to the end of their term. People sell, move, refinance, or split up, and any of those can mean breaking the contract. On a variable mortgage, closed variable products almost always cap the penalty at three months' interest, a simple, predictable number, often in the low thousands. On a closed fixed mortgage, the penalty is the greater of three months' interest or the interest rate differential (IRD): the lender's estimate of the interest it loses by re-lending your money at today's rate.

Here's where it turns costly. The Big Six banks calculate IRD using their posted rates, the inflated sticker rates almost nobody actually pays, rather than the discounted rate you signed at. That math can produce a fixed penalty three to ten times larger than the three-month figure, sometimes running well past ten or twenty thousand dollars. Monoline lenders (mortgage-only lenders that don't offer chequing accounts) generally use a fairer IRD calculation, so the lender matters as much as the product. IRD tends to bite hardest when rates have fallen since you signed, exactly when you'd most want to break and refinance into something cheaper.

None of this makes variable automatically better. If rates climb over your term, variable can cost you more in interest and cost you sleep, and fixed buys real peace of mind. The honest way to read the choice is to weigh three things together: your view on where rates are heading, how much payment certainty is worth to you, and how likely you are to break the mortgage before the term ends. That last factor is the one the industry rarely leads with, and it's often the one that decides which option was actually cheaper.