Fixed or Variable? Compare the Costs and Tradeoffs
Compare fixed and variable mortgages in Canada: payment changes, prepayment penalties, and flexibility. Use your timeline and budget to weigh the tradeoffs.
At a glance
A fixed rate stays the same during the term. A variable rate can change, and its effect on the payment depends on the contract. Compare payment risk, early-exit costs, and flexibility alongside the quoted rate.
- Ask whether a variable mortgage has fixed or adjustable payments.
- Request a written explanation of the prepayment penalty.
- Compare both options on the same balance, term, and amortization.
Choosing between a fixed and variable rate isn't a personality test — it's a math and risk question. Here's how we think about it on every file.
How the two rate structures work
A fixed interest rate remains unchanged for its term. A variable rate can move with the lender’s prime rate. Some variable mortgages have changing payments; others keep payments fixed while the interest and principal portions change. Check the product’s terms rather than assuming the payment will behave one way.
The four questions we ask
- How long do you actually plan to hold this mortgage?
- What's your tolerance for a payment that could move?
- Do you have flexibility in your budget for a 1–2% upward shock?
- How likely are you to break the term early (sell, refinance, port)?
If you might break early, compare the penalty
Ask for the penalty formula for each offer. A closed fixed-rate mortgage may use the greater of three months’ interest or an interest-rate differential; other structures have different terms. Get a lender calculation before deciding to break your mortgage. Compare the details on mortgage rates and refinancing.
If predictable payments matter to you
There is no prize for outsmarting the bond market by 30 basis points. If a fixed payment lets you focus on your life instead of refreshing rate-tracker websites, that's the right answer.
We model both scenarios for every client over the full term — including realistic rate paths and break-fee exposure — before we recommend either.
What an interest-rate differential actually is
A variable-rate penalty is usually three months of interest. A fixed-rate penalty is often the interest-rate differential: the lender compares the rate you are paying with the rate they can earn on a similar loan for the time you have left, and charges you the gap. The contract, not a tweet, has the formula. Some lenders discount the comparison rate. Some do not. We read the clause before anyone breaks a term to chase a lower number.
That is why “which is cheaper today” is the wrong first question. The right one is how likely you are to sell, refinance, or separate inside the term. A file that might move within three years often belongs in a product with a predictable penalty, even when the fixed payment is higher. A file that will stay put can wear a payment that floats.
Revisit the choice at renewal, not every headline
Use the months before renewal to compare options on your actual balance. A rate hold or early-renewal offer does not automatically remove an early-break penalty. Confirm the completion date and costs with the existing lender. Bring the statement and renewal letter to the mortgage renewal conversation.
We still will not publish a live fixed or variable coupon on this site. The number moves. The penalty clause does not, until you sign a new one. Ask for both structures on your balance, with the penalty written beside the payment.
Sources and further reading
- FCAC: Choosing a mortgage
Explains fixed and variable interest rates, payment structures, and contract features.
- FCAC: Mortgage prepayment penalties
Explains prepayment privileges and how a lender calculates a penalty.
- FCAC: Breaking your mortgage contract
Outlines costs and options when changing a mortgage before the term ends.
This guide provides general information. Your lender's terms and your circumstances determine the available options. Our editorial policy explains how we use sources. Report a correction.
