Fixed vs Variable Mortgage: Why Breaking Them Costs Differently
The choice between a fixed and variable mortgage usually comes down to rate stability versus flexibility. There's a less-discussed difference that matters just as much if you ever need to break your mortgage early: fixed and variable mortgages are penalized under completely different rules.
Variable: Always the Simple Calculation
If you have a variable-rate mortgage, breaking it early always costs the same type of penalty: three months' interest on your outstanding balance. There's no IRD, no rate-comparison complexity, no scenario where the penalty balloons unexpectedly. The math is:
Outstanding balance × annual rate ÷ 4
This predictability is one of the underappreciated advantages of a variable mortgage — you always know roughly what breaking it will cost, regardless of what's happened to interest rates since you signed.
Fixed: Predictable Rate, Unpredictable Penalty
Fixed mortgages offer the opposite trade-off. Your monthly payment never changes, but your penalty for breaking early depends on the Interest Rate Differential (IRD) calculation — which is directly tied to how rates have moved since you signed. The same fixed mortgage could cost you a few thousand dollars to break, or tens of thousands, depending entirely on rate movement outside your control.
A Side-by-Side Comparison
Take two identical $400,000 mortgages, both with 24 months remaining, both at a 5% contract rate — one fixed, one variable.
Variable: penalty is always $400,000 × 0.05 ÷ 4 = $5,000, regardless of where rates have moved.
Fixed, if today's comparable rate is 3% (rates dropped since signing): IRD = $400,000 × (0.05 − 0.03) × (24 ÷ 12) = $16,000 — more than triple the variable penalty on an identical balance.
Fixed, if today's comparable rate is 6% (rates rose since signing): IRD calculates to zero, so the fixed mortgage defaults to the same $5,000 three-months'-interest minimum as the variable.
The fixed mortgage's penalty isn't fixed at all — it swings entirely on where rates have gone.
What This Means When Choosing Between Them
If there's a real chance you'll need to break your mortgage mid-term — a likely relocation, a pending sale, general uncertainty about your timeline — that unpredictability is worth weighing alongside the usual rate-stability arguments for fixed mortgages. A variable mortgage's break cost is boring and predictable by design; a fixed mortgage's is not.
This doesn't mean variable is automatically the better choice — rate stability has real value of its own. It means the "which is cheaper to break" question can't be answered in general terms; it depends entirely on where rates sit at the moment you actually need to break it, which is unknowable in advance.
This is general information, not financial advice. Use our Mortgage Penalty Calculator to compare your specific fixed or variable scenario, and confirm the exact figure with your lender before making a decision.