Fixed vs Variable Rate Mortgages in Canada: What the Big Banks Hide

Walk into any of Canada's "Big Five" banks, and they will almost certainly try to sell you a 5-year fixed-rate mortgage. It is the most profitable product for the bank, but is it the best product for you? Understanding the hidden penalties of fixed-rate mortgages could save you tens of thousands of dollars.

The Fixed-Rate Trap: The IRD Penalty

A fixed-rate mortgage guarantees your interest rate and monthly payment will never change for the duration of your term (usually 5 years). The massive downside is the penalty for breaking the mortgage early.

If you need to sell your house, refinance, or break the mortgage for any reason, the bank will charge you an Interest Rate Differential (IRD) penalty. Because of how Canadian banks calculate the IRD using "posted rates," this penalty is notoriously exorbitant. It is not uncommon for a family to face a $15,000 to $30,000 penalty just to break their fixed-rate mortgage.

The Variable Rate Advantage

A variable-rate mortgage fluctuates with the Bank of Canada's prime lending rate. If rates go up, more of your payment goes to interest (or your payment increases). If rates go down, you pay off your principal faster.

The Hidden Superpower: The penalty for breaking a variable-rate mortgage in Canada is almost universally capped at just 3 months of interest. Compared to the massive IRD penalty of a fixed-rate mortgage, the variable rate offers incredible flexibility if life happens and you need to move.

Which Should You Choose?

If you are a highly anxious person who cannot sleep at night worrying about interest rates, the fixed rate is for you. But historically, Canadians who have chosen variable rates and held them for 25 years have saved thousands of dollars compared to their fixed-rate counterparts.

Use our Mortgage Payment Calculator to run the numbers on both current fixed and variable rates.