Buyers arrive at this decision with one question: fixed or variable. It is a reasonable question and it has no universal answer, because answering it correctly would require knowing where interest rates go next.
Meanwhile there are four other choices on the same page, and in most cases they decide more money than the fixed-versus-variable question does. This is what each one actually means.
First, term and amortization are not the same thing
These two get conflated constantly, and nothing else makes sense until they are separated.
The term is how long your contract is in effect. Terms run from a few months to five years or more. When it ends you renew, at whatever rates exist then. You will almost certainly need several terms.
The amortization is how long until the mortgage is gone entirely. A typical arrangement is a five-year term inside a twenty-five-year amortization: you sign five separate contracts over the life of one debt.
So your rate is only locked for the term, never for the amortization. Anyone promising you certainty over twenty-five years is describing something that does not exist.
How long your amortization is allowed to be
If your down payment is under twenty per cent, the maximum is thirty years if you are a first-time buyer or buying a new build, and twenty-five years otherwise. With twenty per cent down or more, your lender sets the maximum. The twenty per cent line matters for more than amortization, and we cover what sits on either side of it in the down payment guide.
Fixed and variable, and the version of variable that surprises people
A fixed rate stays put for the whole term. It is usually higher than a variable rate offered on a comparable term. You are paying a premium for knowing.
A variable rate moves during the term and typically starts lower. What most buyers do not realise is that variable comes in two shapes, and they behave very differently.
With a variable rate and adjustable payment, your payment changes when the rate changes. The effect is immediate and visible.
With a variable rate and fixed payment, your payment stays the same and the split between interest and principal moves instead. This sounds like the safer of the two. It is not, and the federal consumer agency is unusually direct about why. When rates rise, more of each payment goes to interest automatically, and in their words you could end up in a situation where none of your payment goes toward paying down the principal, so instead of paying down your mortgage the total amount you owe will increase.
That is a mortgage growing while you make every payment on time. It is the single most important thing on this page, and if you hold this product and rates have moved, the advice is to contact your lender early rather than wait for renewal to reveal it.
A hybrid splits the balance, part fixed and part variable. It softens both directions. The catch is that the portions may carry different terms, which can make the whole thing awkward to move to another lender later.
Open or closed, and what breaking costs
An open mortgage can be paid off or broken without a prepayment penalty, and carries a higher rate for the privilege. A closed mortgage is cheaper but limits how much extra you can pay each year, and charges a penalty if you break it.
Closed is right for most buyers. Open earns its higher rate only if you expect to sell or pay the mortgage off soon, or expect irregular lump sums.
The reason this matters more than it looks is that breaking a closed mortgage is not rare. You break it when you sell, when you refinance, when a relationship or a job changes. The penalty can run to thousands, and on top of it you may face administration fees, appraisal fees, reinvestment fees, a discharge fee, and repayment of any cash back you took at signing.
Blend and extend, the option that avoids the penalty
If you want a different rate mid-term, many lenders will blend your existing rate with the current one and extend the term, with no prepayment penalty. Administrative fees may still apply.
The federal method works like this. Say you have twenty-four months left at 5.5 per cent and your lender offers 4 per cent on a new five-year term. Multiply the old rate by the months remaining: 5.5 times 24 is 132. Subtract the months remaining from the new term: 60 minus 24 is 36. Multiply the new rate by that: 4 times 36 is 144. Add them: 276. Divide by the new term: 276 divided by 60 is 4.6.
Your blended rate is 4.6 per cent. Worth doing on paper before your lender presents it as a favour, since it tells you whether the offer is fair.
The choice nobody mentions: standard or collateral charge
When you take a mortgage, the lender registers a charge against your property. There are two kinds and the difference is real.
A standard charge secures the mortgage and nothing else, registered for the mortgage amount.
A collateral charge can secure several loans at once, a mortgage and a line of credit together, and the lender may register it for more than you borrowed. That lets you borrow more later without new registration fees, and you only pay interest on what you actually draw.
The trade-off is mobility. Because the registration covers more than the mortgage, moving to another lender at renewal can require discharging and re-registering, with the costs and friction that implies. A borrower who plans to shop every renewal should know which one they signed. Most never ask, and it is not usually volunteered.
Portable and assumable
A portable mortgage moves to your next home carrying its balance, rate and conditions, which is valuable when you are holding a rate better than the market and want to avoid a penalty. If the new home costs less than your mortgage balance, a penalty may still apply.
An assumable mortgage lets a buyer take yours over on the original terms. When rates have risen since you signed, that is a genuine selling feature.
Two conditions people miss. It is typically available on fixed-rate mortgages and not on variable-rate mortgages or home equity lines of credit. And in some provinces the seller stays personally liable after the sale unless the lender formally releases them, which means a buyer who stops paying can become the seller's problem years later. Get the release in writing.
What the amortization choice actually costs
Stretching the amortization is offered as a way to afford more house. It works, and it is not free. Here is the same $500,000 mortgage at 4.4 per cent over two amortizations.
| Amortization | Monthly payment | Total interest |
|---|---|---|
| 25 years | $2,739.64 | $321,891 |
| 30 years | $2,492.06 | $397,143 |
| Difference | $247.58 less per month | $75,252 more interest |
That is the trade in plain terms: about $248 a month now, against roughly $75,000 over the life of the loan. Sometimes it is the right call, because a payment you can survive beats a payment you cannot. It should be a decision, not a default. If you are using the longer amortization to reach a particular price, it is worth checking that price against what the debt service ratios will actually approve first.
The lever that runs the other way
Payment frequency is the cheapest improvement available to most borrowers, and it costs nothing to ask for. An accelerated schedule works out to one extra monthly payment a year.
On that same $500,000 mortgage, accelerated biweekly payments of $1,369.82 clear the debt in roughly twenty-one years and eight months rather than twenty-five, saving in the region of $48,000 in interest. Same mortgage, same rate, one different box on the application.
A published number worth double checking
While preparing this guide we compared our payment maths against the federal consumer agency's own tables. It matched to the penny on eight of nine rows and on every row of their other two tables. One cell disagreed.
Their table of payments on a $300,000 mortgage over twenty-five years lists the 4 per cent payment as $1,587.06. A second table on the same page gives that identical mortgage as $1,578. The correct figure is $1,578.06: the digits are transposed in the first table, and the interest total published beside it, $173,418.18, is only arithmetically possible with the lower payment.
We mention it because the figure has been widely copied, and because it is a fair illustration of the general rule. Check the arithmetic yourself, including ours. The formula is not exotic, but it does need to use semi-annual compounding, which is the Canadian convention and the reason a calculator built for American mortgages will disagree with your lender.
The questions to ask before you sign
- Is this a standard or a collateral charge, and what will it cost me to move lenders at renewal?
- If it is variable, does my payment adjust with the rate, or stay fixed while the split changes?
- What exactly are my prepayment privileges, as a percentage and as a dollar figure?
- How is the prepayment penalty calculated, in writing, with a worked example at today's rates?
- Is it portable, is it assumable, and if it is assumed am I released from liability?
- What payment frequencies are available, and what does accelerated biweekly do to my amortization?
None of these are unusual requests. A lender who will not answer them clearly has told you something useful about the rest of the relationship.