Most People Are Asking The Wrong Question When Choosing Their Mortgage Rate

In every discovery call and strategy meeting I have with clients—whether they're shopping for a home, up for renewal, or looking to refinance—the number one question is always the same: should I go fixed or should I go variable?

Here's what most people don't realize: they think this question is about interest rates. It's not. Well, it is, but it's so much more than that. When you're making the decision between fixed and variable rates, you're actually making two bets. Not one. Two. And most people put all their energy into the smaller bet while completely ignoring the bigger one that could cost them tens of thousands of dollars.

The Conventional Wisdom Is Wrong

The conventional wisdom says that if you're looking for safety and stability, you choose the fixed rate. If you want to save money and can handle risk, you go variable.

But here's the problem: that perceived safety with fixed rates can often turn into an illusion because of the massive penalty that breaking this mortgage could cost if you need to terminate your contract early.

Before we go further, let's quickly define what we're talking about.

Understanding Fixed and Variable Rates

A fixed-rate mortgage means your interest rate is guaranteed for the length of the term, typically five years in Canada. Your payments remain the same, providing stability. So if you lock in at 4.5%, that's your rate for the full term.

A variable-rate mortgage means the interest rate is tied to the Bank of Canada's prime rate, usually as a discount or premium from prime. So if you get prime minus 0.5%, and prime is 5.45%, your rate is 4.95%. When prime changes, your rate changes.

In Canada there are actually two types of variable mortgages, though both are commonly called "variable." There's a true variable rate where your payment stays the same but the split between principal and interest adjusts. And there's an adjustable rate where your payment fluctuates with rate changes. For this article, we'll call both "variable" since the penalty structure is the same.

The Two Bets You're Making

So what are these two bets everyone makes when choosing fixed or variable?

The Small Bet (What Everyone Focuses On): The Interest Rate

This is the bet on whether fixed rates or variable rates will be lower over your term. Historically, variable rates have often been a better financial choice over the long term. Studies in Canada have shown that variable rate borrowers saved money compared to fixed rate borrowers roughly 70 to 90% of the time over rolling five-year periods.

Why does this happen? Banks aren't stupid. When they offer you a fixed rate, they're pricing in their expectation of where rates will go, plus a risk premium. If a bank offers you a 5-year fixed rate at 4.5%, but variable rates are currently at 4%, that extra 0.5% is partly the bank's prediction that rates will rise, and partly your insurance premium for rate protection.

Now, the early 2020s broke traditional patterns. People who locked in fixed rates at 1.5% to 2.5% in 2020-2021 did phenomenally well. Those who took variable rates and watched them spike to 6% or 7% in 2022-2023 saw their payments jump by 50% or more. It was painful.

But even knowing all this history, trying to predict rates is still a fool's game. Even professional economists consistently get this wrong.

The Big Bet (What Everyone Ignores): The Prepayment Penalty

Here's a statistic that should change how you think about this entire decision: roughly two-thirds of Canadians break their mortgage early, typically around the 33-month mark.

Think about that. Most people don't make it through their full five-year term. Why? Life is unpredictable. Divorce. Relocation. Job changes. Better opportunities to refinance. Needing to access equity for renovations or investment.

So the question isn't just "which rate will be lower?" The question is: "what happens if I need to get out of this mortgage before the term ends?"

The Massive Penalty Difference

This is where the rules change completely between fixed and variable.

Variable-rate penalty: Usually a straightforward three months' interest. On a $500,000 mortgage at 4%, that's roughly $5,000. You know exactly what it costs. There's certainty.

Fixed-rate penalty: This is where it gets ugly. It's the greater of three months' interest OR the Interest Rate Differential (IRD). The IRD calculation can amount to several percentage points of the mortgage balance, potentially reaching 900% higher than a variable penalty.

Real Example

Let's say you have a $500,000 mortgage and you need to break it after three years.

• With a variable rate mortgage: Three months' interest at 4% = roughly $5,000
• With a fixed rate mortgage: If you locked in at 4.5% and current rates are now 3.5%, the IRD penalty could easily be $20,000 to $30,000 or more, depending on how your lender calculates it

That's four to six times higher. And here's the kicker: you often don't know this penalty amount until you actually need to break the mortgage.

Why This Matters More Than Rate Savings

Think about it this way. Let's say you save $100 per month by choosing a fixed rate over variable. Over three years, that's $3,600 in savings.

But if you need to break that mortgage and face a $25,000 penalty instead of a $5,000 penalty, you just lost $20,000. All those rate savings? Wiped out instantly, and then some.

There is no amount of rate savings that makes sense if a large penalty traps you later.

Penalty Certainty vs Rate Certainty

Here's the framework that changes everything: Variable rate mortgages have penalty certainty. You know what it costs to get out. Fixed rate mortgages have rate certainty, but penalty uncertainty.

Most people obsess over saving a few thousand in interest and ignore the possibility of paying tens of thousands just to regain flexibility.

When Variable Makes Sense

Variable isn't about "winning on rates." It's about optionality. Variable often makes sense if:

• You might move in the next few years. If there's any chance you'll sell before your term ends, the penalty flexibility is invaluable.
• You may need to refinance. Maybe to access equity, consolidate debt, or take advantage of rate drops. Variable lets you do this affordably.
• You want the ability to adjust without punishment. Life is unpredictable, and you value having options.
• Your life is still evolving. Career changes, family changes, location changes. The flexibility has value even if the rate isn't the lowest.
• You have financial flexibility. If you can handle payment increases of 20-30% without major stress, you can ride out rate cycles.

When Fixed Makes Sense

Fixed can be the right choice, but it should be chosen intentionally, not because it "feels safer" on the surface.

Fixed makes sense if:

• You need absolute payment certainty and your budget is tight. Rate increases would cause genuine financial stress.
• You're confident you won't need changes. You're staying in this home, no refinancing planned, no major life changes expected. Though remember, two-thirds of people are wrong about this.
• You're near retirement with fixed income. You genuinely need stability and are less likely to need flexibility.
• You can absorb a large penalty if needed. You have the financial resources that even a $30,000 penalty wouldn't devastate you.
• The rate is exceptionally low by historical standards. If you can lock in at 2% or 3%, the certainty AND the rate are both great.

The Question You Should Be Asking

Instead of asking "Where will rates go?" ask this: "What would it cost me if I had to change this mortgage?"

If the answer scares you, that tells you more than any rate forecast ever will.

Your Decision Framework

Here's how to make this decision:

1. Assess Your Flexibility Needs

How likely is it that you'll need to break this mortgage early?

• How stable is your relationship, job, location?
• Might you need to access equity in the next 3-5 years?
• Could you receive money that you'd want to put toward the mortgage?
• How confident are you that nothing will change?

If there's meaningful uncertainty, that's a strong signal toward variable for the penalty flexibility.

2. Test Your Financial Capacity

Can you handle payment volatility?

• What's your monthly income stability?
• How much emergency savings do you have?
• Could you absorb a $500 or $700 monthly increase?
• What percentage of your income goes to housing?

If your finances are tight or income is variable, you need to be careful with variable rates, even if the penalty flexibility is attractive.

3. Evaluate The Penalty Scenarios

Run the actual penalty scenarios. Get quotes from lenders and ask them:

• What would the penalty be on a fixed rate if I broke it in year 3?
• What would the penalty be on a variable rate?
• How do they calculate IRD?

See the real numbers. If the fixed rate penalty could be $25,000 and variable is $5,000, that $20,000 difference should weigh heavily in your decision.

4. Consider Rate Predictions (But Don't Rely On Them)

Think about the rate environment, but with humility. If rates are historically high right now, variable might position you to benefit when they eventually come down. If rates are historically low, locking in fixed might make sense.

But don't make this your primary factor. You can't predict rates reliably.

Common Mistakes To Avoid

Assuming Fixed Is "Safer": The biggest mistake is assuming fixed is automatically safer. Safety without flexibility can be expensive. If a fixed rate traps you with a massive penalty, that's not safe, that's risky.

Choosing Based Only On Current Rate: Don't choose variable just because the current rate is lower. Factor in your ability to handle increases and your need for penalty flexibility.

Ignoring Life Uncertainty: Most people think "I'll definitely stay put." But two-thirds of people break their mortgages early. Don't underestimate how much life can change.

Not Understanding The Penalty Calculation: Get specific numbers from your lender on how they calculate IRD penalties. Some lenders are better than others. This matters enormously.

The Bottom Line

The fixed versus variable decision isn't about predicting where rates will go. It's about understanding the two bets you're making.

The Small Bet: Will fixed or variable rates be lower over your term? Historically, variable wins more often, but not always.

The Big Bet: What will it cost you if you need to break this mortgage early? Variable has penalty certainty around $5,000. Fixed has penalty uncertainty that could be $20,000 to $30,000 or more.

Most people obsess over the small bet and ignore the big bet. Don't make that mistake.

The right choice isn't fixed or variable. The right choice is understanding your time horizon, your need for flexibility, and the real cost of being wrong.

Once you see that clearly, the rate becomes secondary.

Remember: there is no amount of rate savings that makes sense if a large penalty traps you later. Think about flexibility first, rates second.

Your mortgage should work for your life, not trap you in it.