How each one works
A fixed rate is locked for your entire term. Your payment never moves, no matter what happens in the broader rate environment, so you know exactly what you owe, every month, for the whole term. A variable rate is set relative to your lender’s prime rate: quoted as something like “prime minus 0.75%.” When prime moves, your rate moves with it. There are two versions of this: with an adjustable-payment variable, your actual payment goes up or down as rates change. With a fixed-payment variable (more common in Canada), your payment stays the same, but the split between interest and principal shifts, with more interest when rates rise, more principal when they fall.
A quick note on the trigger rate
With a fixed-payment variable, if rates rise a lot, there’s a point (called the trigger rate) where your payment only covers interest, with nothing going toward your balance. This is uncommon and usually gets caught well before it becomes a real problem, but it’s worth simply asking your lender what your trigger rate would be, so you know where it sits.
What it costs to break early
This is the part that actually decides most people’s choice. Life changes. You might sell, you refinance, your situation shifts. What that costs you depends entirely on which type of mortgage you have:
- Variable mortgages are simple to break: the penalty is almost always three months’ interest on your remaining balance.
- Fixed mortgages use whichever is greater of three months’ interest OR the Interest Rate Differential (IRD), and IRD is where things get expensive. It compensates the lender for the difference between your rate and what they could get today, calculated across your remaining term. The exact method varies significantly by lender, which is why two people with an identical balance and term can get very different IRD numbers.
Here’s roughly how that plays out: say you have $400,000 left on a fixed mortgage with 2 years remaining, and rates have dropped since you signed. The lender calculates a penalty based on that gap. It could land anywhere from a couple thousand dollars to over ten thousand, depending on the lender’s exact method. The only way to know your real number is to ask your lender directly. This example is just to show how the math works, not a prediction of your own cost.
So how do you actually choose?
- If breaking early would cause real financial stress, or you strongly prefer knowing your exact payment for years at a time, fixed removes that uncertainty.
- If there’s a real chance you’ll sell, move, or refinance before your term ends, variable’s much smaller, more predictable penalty is a genuine advantage, even if the rate itself moves around a bit.
- If you’re not sure how long you’ll keep the mortgage as-is, ask about portability (moving your mortgage to a new property without a penalty) and prepayment privileges, both of which affect how much flexibility you actually have either way.
There’s no version of this that’s universally “better.” It depends on your own risk tolerance and how likely your plans are to change. That’s exactly the kind of thing worth walking through on a call rather than guessing at.