| Fixed | Variable | |
|---|---|---|
| Rate | Locked for the term | Moves with prime |
| Payment | Predictable | Can change, or stay the same while the principal portion changes, depending on the lender |
| Breaking the mortgage early | Penalty is often the greater of three months' interest or the interest rate differential (IRD), which can be large | Penalty is usually three months' interest |
| Best for | Buyers who want certainty and plan to stay put | Buyers with room in their budget who may move or refinance within the term |
The penalty question most buyers miss. Many first-time buyers move or upsize within five years. If you break a fixed-rate mortgage early, the interest rate differential penalty can run into the tens of thousands, especially with some big-bank formulas. A variable mortgage's three-month penalty is usually far smaller. If there's a real chance you'll sell before your term is up, ask your broker how the penalty is calculated before you choose.
Term length. Fixed rates come in terms of 1, 2, 3, 4, 5, 7 and 10 years. Variable rates are typically offered on 3- or 5-year terms, and most lenders now offer only 5. Shorter terms can make sense if you expect to move or think rates will fall. Your broker can model the trade-offs.
Christian's take: People usually shop for the best rate or the lowest monthly payment. There's more to the equation than that. A more holistic approach looks at the big picture, where you want to be in five to ten years, and makes the mortgage decision part of that bigger picture.
